If you could retire, but it meant a substantially lower living standard, would you do it?
For many savers, the answer is no.
Retirement replacement, the percentage of preretirement income that is replaced during retirement, is a more important factor for many Americans than was previously thought, a new study suggests. The study also found that regional economies play a significant role in the retirement decision.
For individuals, the findings are a reminder that we sometimes have less control over when we will retire than we might hope, and that planning to save aggressively near the end of a working life could be dangerous.
A major career hit boosts the chances you may not hit your income-replacement number, experts say.
Link discovered
Studying labor-force participation rates among men 55 to 64, researchers at Boston College’s Center for Retirement Research said they have found a link between levels of income replacement and whether people continue to work in later years.
In states where retirees replace a relatively high percentage of preretirement income, fewer men between the ages of 55 and 64 were in the labor force, researchers said. Conversely, in states with low replacement rates, people tend to work longer. Check out http://crr.bc.edu. A recent publication at that site offers an explanation about why older men continue working in some states.
In West Virginia, where researchers pegged replacement income at nearly 70 percent, just 40 percent of men 55 to 64 are in the labor force. And in South Dakota, with a replacement rate below 60 percent, almost 90 percent of that age group are working, according to the study, which used Census data to construct the rates.
That may sound intuitive, but it’s an important finding because it means the level of benefits, not just the fact benefits are available at all, matters to retirees, said Alicia Munnell, director of the Boston organization.
Four years ago, Gaylen Smith, a $70,000-a-year quality-control engineer in Minnesota, turned down a raise and transfer to Texas when his communications-equipment plant closed.
Smith moved to Sioux Falls, S.D., to be near family and friends but did not find work as an engineer, causing a major disruption in his retirement savings plan.
“There were jobs I was perfect for, but I never even got a call back,” said Smith, 60. He blames age discrimination, having listed dates of employment on his resume, a costly mistake, he said.
A subsequent small-business failure left Smith and his wife, Connie, nearly penniless. They filed for bankruptcy protection, lost or sold many of their possessions and will lose their home this year, Gaylen Smith said.
With the help of Experience Works, a nationwide job-training center for low-income seniors, he found a 24-hour-a-week job as an administrative assistant for Volunteers of America, making $5.85 an hour.
With their nest egg wiped out, the couple is cobbling together income and focusing on short-term goals. Connie is drawing Social Security, and Gaylen can begin in a couple of years.
Meanwhile, his part-time status allows him to exercise two hours each day, which he hopes will help ward off future medical problems. And working for a non-profit makes him feel appreciated for his experience. In addition to mundane administrative duties, he said, he’s also helping the fledgling local organization study grant opportunities.
“We’re happy. We just don’t have the toys we used to,” he said.
Similar stories are happening at all income levels, though not all involve such dramatic circumstances.
“High income earners, in particular, find it very difficult to replace their income” if retirement comes abruptly, said Scott Munkvold, a financial planner and managing director of Financial Solutions Advisory Group Inc. in Chicago.
Revamped plan
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Recently, Munkvold helped a 52-year-old client, a real estate developer, remake his retirement plan after his income dropped from $250,000 last year to an estimated $150,000 this year.
“We had planned on him saving $50,000 for retirement this year, but now his discretionary income is so much less, I doubt he’ll be able to do that,” he said.
The solution? The client didn’t want to push retirement back, so they settled on ratcheting up the stock exposure in his portfolio to 75 percent from 60 percent. Munkvold said the client’s tolerance for market risk could sustain that higher stock exposure, and the move still leaves a quarter of the portfolio in fixed-income investments.
That won’t solve the entire problem, however, and planners, including Munkvold, said they more often are talking with clients about dampening spending levels.
“Another thing we try to do is get as many big expenses out of the way as possible early, like a second home,” he said.
That way, clients are spending less in the few years immediately prior to retirement, and an abrupt job loss a year early doesn’t kill the entire plan.
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