January 8, 2013

Healthy, Wealthy and Not Retiring

Rich and poor retire at vastly different ages – nine years in the most extreme case.

A rich man in excellent health works three years longer than a poor man in excellent health – that’s a fairly long time when one is talking about the decision to retire. But if both men are unhealthy, the difference is much larger. The rich man works nine years longer than his low-earning counterpart.

This complex interplay between one’s financial and physical conditions can be seen in the above chart, which shows retirement ages for American households in five income groups, rich to poor. Among financial planners and prospective retirees, as well as academics, any discussion about the retirement decision is typically dominated by how much a person earns and saves during his or her lifetime. Health and medical expenses are usually a given.

That is “too simplistic,” said Ananth Seshadri, an economist at the University of Wisconsin in Madison.

The chart, taken from a paper by Seshadri and his Wisconsin colleague, John Karl Scholz, for the Retirement Research Consortium, also dramatizes the complex impacts on various groups that would occur if Congress were to raise the eligibility age for Medicare, which it is considering among dozens of other deficit-reduction proposals.

Think about the working man in heavy industry. Research has shown that men in physically demanding jobs, such as aluminum workers, often are forced to retire earlier out of poor health or sheer exhaustion.

But as a wealthy man ages, he is able to pay for good medical care for his heart or hip problem, which enables him to delay retiring. Some people, not entirely consciously, also may choose higher-paying employment – or they may save more – in anticipation that they will have big medical bills when they’re older, Seshadri said.

“People get earnings shocks, but more importantly people get health shocks,” he said. “Medical expenses are a big deal later in life.”

And a primary consideration when one is thinking ahead about when to retire.

Click here for another research paper by the Retirement Research Consortium showing that access to Medicare is a primary consideration when one is thinking ahead about when to retire.

Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government. Learn More

January 3, 2013

Happy Retirement?

This article was originally posted on Squared Away on October 23.

A large majority of people in a survey released last week identified saving for retirement as their top financial priority. If that’s the case, then why aren’t Americans saving enough?

Stuart Ritter, senior financial planner for T. Rowe Price, the mutual fund company that conducted the survey, has some theories about that. Squared Away is also interested in what readers have to say and encourages comments in the space provided at the end of this article.

But first the survey: about 72 percent of Americans identified saving for retirement as “their top financial goal,” with 42 percent saying that a contribution of at least 15 percent of their pay is “ideal.”

Yet 68 percent said they are saving 10 percent or less, which Ritter called “not very much.” The average contribution is about 8 percent of pay, according to Fidelity Investments, which tracks client contributions to the 401(k)s it manages.

The Internal Revenue Service last week increased the limit on contributions to 401(k) and 403(b) retirement plans from $17,000 to $17,500. The so-called “catch-up” contribution available to people who are age 50 or over remains unchanged at $5,500.

The question is: why do Americans give short shrift to their 401(k)s, even as people become increasingly aware that their dependence on them for retirement income grows? Ritter offered a few theories in a telephone interview last week: …Learn More