Unprepared for Retirement

For the next two weeks, we head deep into the weeds of spending, saving, and investing.

This week we look at the retirement readiness of the Baby Boomers. Next week we will look at an excellent short book by William Bernstein that lays out a plan for Millennials to retire in relative comfort.

A short research paper from Boston College, "Will the Rebound in Equities and Housing Save Retirements?," discusses how an increase in the stock market and rising housing prices, from 2010 to 2013 haven't done much to help the majority of people near retirement.

I'd like to focus on some main points in the article that discuss the general shape that near-retirees are in financially rather than go deep into the research.  The main points of the article for our purposes are:

The National Retirement Risk Index (NRRI) shows that in 2013 shows that only 50% of people will be able to replace at least 90% their income at age 65.  Those that cannot are considered at risk. For most people, their home is their largest asset. Yet, home prices have not fully rebounded from the 2007 highs.  That means most people are less prepared financially for retirement than they were in 2007.

The previous point is even worse since most people do not downsize their housing expenses in retirement (see last week's article). For most people approaching retirement, their wealth to income ratio (how much they own vs. how much they earn) isn’t sufficient to maintain their living standards.  In plain English: People have not saved enough money. 

The article concludes with this key statement: "The only way out of this box is for people to save more or work longer". I would add saving more equals spending less. It bears repeating, saving more means you must spend less. 

One last point.  If you are wondering (and you should, if you want a comfortable retirement) "what should my wealth to income ratio be as I near retirement"? My recommendation, based on some excellent research by Marlena Lee at Dimensional Funds, is that your wealth should equal at least eight to ten times your final gross salary.

Download the article