Retirees Must Lower Standard of Living to Make Retirement Savings Last

July 14, 2008 ( - Almost three out of five new middle-class retirees will outlive their financial assets if they attempt to maintain their pre-retirement standard of living, according to a new study conducted by Ernst & Young LLP on behalf of Americans for Secure Retirement.

In a telephone press conference, primary study author Tom Neubig, National Director of Quantitative Economics and Statistics, Ernst & Young, said the study finds that middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24% to minimize the likelihood of outliving their financial assets, and those who are seven years out from retirement will have to reduce their standard of living by an average of 37%.

Joe Reali, Chairman of Americans for Secure Retirement, clarified that while experts say retirees can maintain the same standard of living with income equal to 59% to 71% of their pre-retirement wages, the study findings mean current retirees can only consume an annual income 24% lower than these levels to make their retirement savings last.

Neubig also noted that the study found a guaranteed source of retirement income beyond Social Security, such as an annuity or defined benefit plan, better prepared retirees to have a financially secure retirement. As an example, he said married couples who have a guaranteed source of retirement other than Social Security income making $75,000 at retirement have a 31% chance of outliving their financial assets if they retain their pre-retirement standard of living, compared to a 90% chance for those with Social Security as their only guaranteed income.

Other key findings of the study include:

  • Married couples are more likely to outlive their financial assets, due to their longer joint life spans, than single households.
  • Citizens of Montana, Wyoming, and South Dakota have the highest likelihood of outliving retirement savings.
  • Citizens of D.C., Rhode Island, Utah, and New York have the least likelihood of outliving retirement savings.

Neubig pointed out that many D.C. residents are more financially prepared for retirement because they participate in the federal defined benefit plan.

The complete study report and details by state can be obtained at .

According to Reali: "The crux of the problem is not just savings, but policymakers need to focus on helping Americans make savings last over the course of retirement." He added that the study findings "provide a strong message to policymakers that the focus on the management of assets is as important as the focus on increased savings rates."

Neubig said the Ernst & Young study results also point out to policymakers the importance of guaranteed sources of income such as DB plans and annuities to guard against risks created by longevity, investment returns, and inflation.

Americans for Secure Retirement supports legislation currently before Congress, The Retirement Security for Life Act (H.R. 2205/S. 1010), that would encourage Americans to secure a steady stream of income in retirement through annuitization. The legislation calls for a tax incentive for lifetime annuities. Specifically, it would exclude 50% of the income received from a lifetime annuity from taxation, up to $20,000 per year.

The Ernst & Young study evaluates retirement vulnerability for 36 different types of typical middle-class households, defined by three income levels ($50,000, $75,000 and $100,000 of pre-retirement income); for married couples, single males and single females; by employer-provided defined benefit pension coverage status; and by age (near- and new- retiree). The near-retiree is age 58, and planning to retire at age 65. The recent retiree is age 65 and has just entered retirement.

Based on government data available to the public, the study estimates the key financial and income information for these 36 household types. Based on the relative weights of the different household examples, using E&Y's Retirement Analytics model, the study estimates the national overall retirement vulnerability of middle-class near and new-retirees.