Defined-benefit pension is a huge contributor to financial security in retirement
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A new study indicates most of us will die broke.
Ernst & Young LLP recently completed research on financial security in retirement. The study examines the retirement savings and other resources for Americans with $50,000 to $100,000 of preretirement income. It considers investment returns, volatility, healthcare expenses, and takes into account the eventual death of a spouse. The study concludes that households with a defined-benefit pension as well as Social Security and savings are far less likely to outlive their savings than households without a defined-benefit pension.
A couple with preretirement earnings of $75,000 that will have a pension has a 31 percent chance of outliving their assets. That couple without a pension has a 90 percent chance of outliving assets.
The study confirms what Alicia Munnell, director of the Center for Retirement Research at Boston College, has been warning for years - that a smaller role for Social Security benefits, rising Medicare premiums, and disappearing pensions will make the retirement of younger workers far more difficult than those of current and past retirees. Worse, in her book "Coming Up Short," she shows that 401(k) plans are a poor replacement for worker pensions.
So where is the hopeful news?
Why? Because we've made heavy commitments throughout our adult lives. Take those completed commitments (children, mortgage, etc.) into account, and the income you need to replace in retirement is far lower than the 70-plus percent called for by the financial services industry.
If you are single, rent, have no children, and never borrowed for education, the conventional replacement goals are relevant. But if you ever married, had children and worked on paying off a 30-year home mortgage, you've never had 70 to 85 percent of your income to spend on yourself and spouse. Consequently, the income you need to replace may be 15 to 30 percentage points lower.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com.
