Most middle-class retirees will outlive their savings

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.

The study also finds that middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize the likelihood of outliving their financial assets. Those Americans seven years out from retirement are even less prepared and the study estimates that they will have to reduce their standard of living by even more, an average of 37 percent. These reductions will be necessary even when assuming that retirees can maintain the same standard of living with income equal to 59 to 71 percent of their pre-retirement wages.

"Many Americans envision a retirement where their lifestyle continues much as before," said Tom Neubig of Ernst & Young. "Our work shows that this is not a realistic expectation and that, with the current state of savings and potentially very long life expectancies, many retirees will have to cut back far more on expenditures than they had ever expected."

The study finds that retirees are much better prepared to have a financially secure retirement if they have a guaranteed source of retirement income beyond Social Security, such as an annuity or defined benefit plan. For example, married couples who have a guaranteed source of retirement other than Social Security income making $75,000 at retirement have a 31 percent chance of outliving their financial assets if they retain their pre-retirement standard of living. Those with Social Security as their only guaranteed income have a 90 percent chance of outliving their financial assets during retirement.

"As a guaranteed source of retirement income, life annuities relieve the risks and burdens of managing a nest egg and can maximize savings' value over the course of an individual's retirement years," said Joe Reali, chairman of the Americans for Secure Retirement coalition. "Life annuities are the only vehicle besides pensions and Social Security that provide a steady stream of income for life – a 'paycheck for life.'"

The report was conducted by Ernst & Young on behalf of Americans for Secure Retirement, a coalition of more than 50 member and affiliate organizations representing women's, small business, agriculture, Hispanic and African-American groups as well as the life insurance industry. The coalition is committed to raising awareness about retirement challenges facing Americans and advocating for policies that help Americans secure a steady stream of income for their retirement.

Other key findings of the study include:

- Persons that are 5-10 years away from retirement have a higher risk of outliving their financial assets than those currently at retirement age. To avoid outliving their retirement assets, these workers aged 55 to 59 will have to increase their savings substantially or work beyond age 65. Otherwise, they will have to reduce their standard of living significantly more than today's retirees to minimize the risk of exhausting their financial assets.

- Married couples are more likely to outlive their financial assets, due to their longer joint life spans, than single households.

- Montana, Wyoming and South Dakota citizens have the highest likelihood of outliving retirement savings.

- Washington, D.C.; Rhode Island; Utah; and New York citizens have the least likelihood of outliving retirement savings.

"The findings of this report underscore that the public policy debate on retirement needs to increasingly focus on how to help Americans manage their retirement savings so that they last throughout retirement. This includes pursuing policies that encourage retirement vehicles that provide retirees with steady streams of income for their retirement," said Reali.

Legislation currently before Congress, The Retirement Security for Life Act (H.R. 2205/S. 1010), would encourage Americans to secure a steady stream of income in retirement through annuitization. The bills will encourage Americans to have a steady source of guaranteed income in retirement providing a tax incentive for lifetime annuities. Specifically, this legislation would exclude 50 percent of the income received from a lifetime annuity from taxation, up to $20,000 per year. For an average American taxpayer in the 25 percent tax bracket, this would result in $5,000 of tax savings. The legislation, introduced by Senators Gordon Smith (R-OR) and Kent Conrad (D-ND) in the Senate and Representatives Stephanie Tubbs-Jones (D-Ohio) and Phil English (R-Pennsylvania), has the support of 70 co-sponsors in the House and 12 in the Senate.