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Study: Half of Those Nearing Retirement May Run Out of Money

By Linda Stern

Updated on: July 14, 2010 / 1:13 PM EDT / MoneyWatch

Dramatically high percentages of Americans -- even in the upper-income categories -- are likely to run short of money after 10 or 20 years of retirement, reports a new study from the Employee Benefit Research Institute.

EBRI researchers calculated that after 20 years of retirement, 29 percent of upper middle class people will have run out of money, and it's even worse at lower income levels. Even the highest-earning quartile stands a 1 in 7 chance of running short. Looking at the numbers by age group, the study found that roughly 47 percent of those closest to retirement (between 56 and 62) won't have enough cash to get them through 20 years. Almost 44 percent of younger boomers, and 45 percent of Gen Xers are at risk of running out of money.

But, hey -- it's getting better. When EBRI did this study in 2003, more than 59 percent of early boomers and almost 55 percent of late boomers were unprepared for retirement. That's because automatic enrollment, target date mutual funds, and other 401(k) enhancements are forcing more people to save more.

And before you go running for the nearest bridge, take heart in this: Some of EBRI's methodology skews the results to a worst case scenario. For example, it excludes any non-retirement household savings. While it is true that at lower income levels, savings are small, that is not true at upper income levels. So if you've got any investments or savings that are not classified as "retirement" funds such as IRAs, you're ahead of the EBRI results. This study also assumes that everyone retires at 65. Other studies have demonstrated the big benefits that can accrue when people work even one or two years longer than that. Some more takeaway:

Workplace retirement plans are good. EBRI finds that 401(k) participation is the key to a sustainable retirement lifestyle. (Of course, EBRI is mostly funded by companies that provide 401(k) plans and those that sell them, so take that with a grain of salt.) If you have a plan at work and your employer matches your contributions, you should participate at least to the level of your employer's match. And you probably should participate even more than that. Unless there's something bad about your company plan, such as unreasonably high fees or lousy investment choices, you should contribute the maximum amount.

Investing is good, too. Folks are in better shape now than they were in 2003 in part because some of their money is being pushed automatically into balanced mutual funds that include stocks and bonds. Over decades of retirement savings, that will earn you more than keeping your money in the "safest" money market fund or bank account.

There's no need to panic. The EBRI study doesn't lay out the details, but there are a lot of little ways to fill that retirement spending gap. You can work a little bit longer, spend a little bit less, or defer collecting Social Security for a year or two. Little changes made early on can have a big impact on shortfalls later on.

There are policy implications. Unsurprisingly, the lowest earners are the ones most likely to run out of money, and they are also the least able to save as much as they will need to last through a decades-long retirement. I'm not sure how that will affect the Social Security debate to come, but it should have some impact. Perhaps research like this will be used to open the door to means-tested programs, either on the tax or the spending side.

You should save more. There's probably never been a person in history who thought she had too much money when she retired. So even if EBRI's pictures is a tad gloomier than it has to be, there's no reason not to plow as much as possible into retirement (and non-retirement) savings and investment accounts. Maybe you'll have bad luck and be forced to retire before you're ready, or need expensive medical care. Or maybe you'll get lucky, live to 100, and spend nights worrying about whom to give your money away to. Either way, it couldn't hurt to save more.

photo by Akash Kurdekar on Flickr.
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