Total Benefits:Short Comings?

Illustration By Harry Campbell

Middle-income Americans now retiring will have to reduce their standard of living by an average of 24% to avoid outliving their financial assets, a new study finds. Even those still seven years out from retirement, less prepared, could be looking at a 37% reduction in their living standard.

That holds true even when assuming that retirees can get by on 59% to 71% of their pre-retirement wages, according to the study, done by Ernst & Young LLP on behalf of the Americans for Secure Retirement coalition. Members of that coalition, which supports legislation pending in Congress to encourage Americans to utilize annuities, include representatives of business, workers, and retirement-income product proponents such as The Committee of Annuity Insurers.

The long-used 70% target is what Americans should have been aiming for all along, says Joe Reali, Chairman of Americans for Secure Retirement.

However, many have not saved at nearly the level needed to achieve that, he says, a situation exacerbated by declining defined benefit coverage and potentially dwindling Social Security benefits. "Their nest egg is too small to make up that difference in many instances," he says, "and, for those who do not have a defined benefit plan, their nest egg is way too small."

As a result, Reali says, "Those close to retirement are likely to have a substantial reduction in their standard of living," For many middle-class Americans, post-retirement income expectations probably need to be reduced by another 30%, he says. "[Many Americans] will have to make do with half," he says. "A lot of people are tremendously underprepared for retirement."

A study released in July by consultant Hewitt Associates LLC finds that just 19% of the group studied—nearly 2 million employees at 72 large U.S. companies—will be able to meet 100% of Hewitt's estimation of their needs in retirement.

While the Americans for Secure Retirement study assumes that retirees can get by if they have 59% to 71% of their pre-retirement wages, Hewitt predicts that retirees will need an average of 126% of their pre-retirement income, though the percentage will vary based on their specific situations.

    The MetLife Mature Market Institute's Retirement Income IQ Test, a national poll released in June, indicates that 69% of pre-retirees think they will be able to draw down more from their retirement savings than they actually can safely. Of those surveyed, 43% mistakenly believe they can withdraw 10% or more each year while still preserving their principal.

"People underestimate how long they are going to live, and they overestimate how much they can draw down in retirement," says Roberta Rafaloff, a MetLife Vice President.