WASHINGTON – Through the first half of the 20th century, a long and comfortable retirement was something few workers experienced. Pensions were not common, Social Security was just getting started, and anyway, most workers died on the job or shortly after retiring.
Then things changed. Social Security flowered. Unions extracted better pensions and other benefits from employers.
Now, that latter period, especially the years from about 1975 to 2000, is beginning to look like the golden age of retirement in America. In other words, those were the good old days, and if you’re still working, there’s a good chance you’ve missed out.
The retirement that looms for many of today’s workers is likely to be quite different. While some will still have that magic combination of Social Security, a private pension, a 401(k) and company-sponsored retiree medical insurance, their numbers are shrinking steadily.
The conclusions of experts who study the situation are depressingly uniform. Retiree medical insurance is fading fast. Private pensions – the kind that provide a lifetime stream of income – have declined drastically over the past two decades, though they are slipping more slowly now. Social Security’s future is problematic, and workers are not doing well in their 401(k)s.
The do-it-yourself trend in retirement is the heart of the problem, but not widely appreciated is the impact of the disappearance of retiree health insurance.
A new study finds that medical costs can equal 20 percent of pre-retirement income for a worker who retires at 65 and who has no employer health care benefits. In other words, a worker who has savings and pension income adequate to replace all of her pre-retirement income is really 20 percent short of that unless she has some form of employer medical subsidy. And that assumes Medicare eligibility. Workers retiring early without employer medical are projected to have only 59 percent of pre-retirement income left after medical expenses.
The study, by Hewitt Associates, notes that other research indicates that retirees need to have enough resources to replace 85 to 90 percent of their pre-retirement income to maintain their standard of living.
Hewitt found that only workers who have the entire package, including a traditional pension and retiree medical coverage, seem likely to reach that level.
Those who have only a 401(k) and Social Security start off at 80 percent of pre-retirement income and go down from there, depending on whether they have employer medical and how generous it is.
In fact, the assumptions in the study are such that, if the findings are correct, many workers will be even worse off. The retirement income projections assume, among other things, that the worker retires at 65, lives 20 years in retirement and draws down 100 percent of her 401(k) balance during that time. Since that’s right around the actuarial life expectancy of retirees today, all those who live longer – and half can expect to – will exhaust their 401(k) funds before their death.
Lori Lucas, director of participant research at Hewitt, calls the findings “a wake-up call” for employees.
“Employees need to make their 401(k) programs work harder for them,” and they “need to anticipate the potential cost of paying for much of their retiree medical themselves,” she said.
For many workers, the answer is going to be simple and not pleasant: They will have to work longer and be retired fewer years. Hewitt found that working until age 67, instead of 65, and contributing an additional 2 percent of pay to a 401(k) would allow many younger workers to reach 80 percent of pre-retirement income, even with health care costs included.
And while it’s hard to do with jobs in short supply in many parts of the economy, workers should look hard at potential employers’ pension offerings, give weight to the best one, and let the companies know that a good pension is a serious factor in choosing among them.
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