Retirement Readiness Falls on Housing, Insurer Says

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Oct. 27 (Bloomberg) — Fewer U.S. households are prepared for retirement after the value of their homes and investment portfolios declined in the recession, Nationwide Mutual Insurance Co. said.

Fifty-one percent of Americans would be unable to maintain their standard of living if they retired at age 65, compared with 44 percent in 2007, the insurer said today in a statement, citing the National Retirement Risk Index it developed with the Center for Retirement Research at Boston College. The estimate is “conservative” because it doesn’t include medical costs or long-term care, the insurer said.

“The real problem behind this is that so many households were dependant on their home values,” Paul Ballew, a senior vice president of customer insights and analytics at Nationwide, said in an interview. “Once home prices came back down to normal levels, we wake up one day and realize we don’t have adequate savings.”

Americans are facing a decline in the value of their homes and other assets at the same time the U.S. government is pushing back the age that retirees qualify for full Social Security benefits. The average 401(k) retirement savings account fell by almost one-third in 2008, and people aren’t saving enough to make up the difference, Ballew said.

The U.S. median price of existing homes was $174,900 in September, 24 percent less than its peak in July 2006, according to the National Association of Realtors. The average balance of 401(k) accounts at the end of 2008 was $45,519, compared with $65,454 a year earlier, reflecting market losses, according to data collected by the Employee Benefit Research Institute, based in Washington.

Savings Rate

Equity markets have improved in 2009, with the Standard & Poor’s 500 Index climbing 18 percent this year before today. Individuals in higher-income brackets with more stock holdings will benefit most from the index’s recovery, Ballew said. “For non-upper income Americans, they were just housing-dependent,” he said.

The U.S. personal savings rate fell to 3 percent of disposable income in August from 4 percent in July, compared with 8.9 percent at the end of 1992. The saving rates needs to increase to 8 percent to 10 percent to compensate for the drop in retirement funds, Ballew said.

“The level of savings that has to be sustained over a period of a decade is much higher than what anybody would have assessed a few years ago,” Ballew said.

Running Dry

Social Security statistics show that 2.57 million people requested social security benefits in the 12 months ended in September, up from 2.1 million applications in the same period a year earlier, as the first baby boomers — those born right after World War II — are starting to retire. Applications for the benefits rose almost 50 percent more than expected this year because of the recession.

The shift in the age of full eligibility for benefits from 65 to 67 further erodes the income available to those who plan to retire at 65, Ballew said. The Social Security trust fund will run out of assets in 2037, four years sooner than previously forecast, and expenses will exceed revenue beginning in 2016, the trustees of the program said in May.

Eligibility requirements and average retirement ages are likely to be increased further to make up for a shortfall in Social Security funds, Ballew said.

The retirement risk index estimates how much income households are expected to have in retirement relative to their pre-retirement income, Nationwide said. The rate is compared with an income that would allow the household to maintain their standard of living. Those that fall more than 10 percent below the target rate are considered ‘at risk.’ The Boston College survey measured retirement readiness through June.

Nationwide, based in Columbus, Ohio, sells home, auto, business and life insurance. The company is owned by its policyholders.

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