Americans not saving for retirement

SIA Retirement study shows Americans are ‘dissaving’ and finds a grim situation is worsening. Nearly half of American households are not saving at all; and two thirds are not saving enough to retire adequately.

Reports of how poorly Americans are preparing for retirement have understated this looming problem -- and the situation is getting worse, according to a research report released today by the Securities Industry Association (SIA). Nearly half of American households are not saving at all; and two thirds are not saving enough to retire adequately. The SIA study, Retirement Savings: By The Numbers, examines both the causes for the decline in saving and the consequences.

“Americans are not saving enough for retirement,” said SIA President Marc Lackritz.  “The SIA study more than confirms our worry – in fact, it points to reasons for growing concern that the housing boom is turning into a retirement bust.”

“This new data offers a far more realistic and, unfortunately, grim outlook than most previous forecasts,” offers SIA Chief Economist Frank Fernandez.  “The present savings behavior needs to dramatically change, and soon, if most Americans approaching retirement are to recover and save enough for retirement.”

Causes and Consequences

The SIA Retirement Study pointed to the ‘wealth effect’ – or that individuals save less as they perceive their net worth to increase – as a key contributor to the savings decline.  More specifically, the appreciation of housing prices generated a rise in net worth that is more broadly distributed than earlier increases driven by the equity market boom, which helped extend the wealth effect to lower income groups.  However, those are the households least able to afford a reduction in savings and a rise in debt.

Other factors continue to hinder Americans’ abilities to save, including: higher fuel prices and rising interest payments eroding consumer purchasing power.  Also, asset price inflation has come to a halt, at least for now, and the possibility that lower and middle income households can increase savings appears to be limited.

As a result, it appears that roughly half of all baby boomers, the next wave of retirees, will be unable to maintain their standard of living in retirement, even if they postpone retirement.  Also, down the road: if dissavings continues, as many as 20% of baby boomers will live in poverty after they reach 65 years of age, roughly double the number of impoverished seniors today.

Boomers Leading the Way to Lack Luster Retirement Years
Many leading-edge boomers -- the first of whom turn 60 this year -- still believe retirement will be their "golden years.”  However, the reality is quite different.  For many, if not most of this group, retirement will be postponed, perhaps indefinitely and will require a severe tightening of the purse strings – a vast departure from the comfortable lifestyles common amongst much of the boomer generation.

"The least prepared half of leading-edge boomers would need to mount a substantial and sustained saving effort now if they hope to avoid moderate to severe reductions in their standard of living after the age of 65," says Fernandez, citing the SIA study.  "For most, the likelihood of such a fundamental change in behavior seems improbable."

Other interesting conclusions and insights include:

 Home is Where The Money Is:  For many Americans, nearly fifty percent of their net worth is based on the value of their home.  Given this concentration, if housing prices slip, or simply stop rising, while the cost of servicing mortgage debt rises, then net worth and measures of the adequacy of retirement savings will deteriorate further. 

Retirement Awareness Increases, Responsibility Decreases:  Both the number and percentage of households that owned a retirement account of any kind – whether an individual retirement account (IRA), a 401(k) or other employment-based plan – have fallen since 2001.  Participation rates are declining and those who hold retirement accounts underutilize them.

Stepping Up to The Plate

 “This is a critical time for American consumers to take control of their financial well-being in retirement,” said Lackritz.  “The research we’ve conducted as well as other resources we have been developing, such as RetireSmarts.com (http://www.retiresmarts.com/) are meant to drive awareness of the retirement issue so that consumers, investors, policymakers and businesses can all work together to find viable solutions to the growing problem.”

The SIA’s new public education retirement Web site, www.RetireSmarts.com, is a valuable resource on data, trends and statistical information for the retirement climate across the United States.  Also, www.pathtoinvesting.org, administered by SIA’s non-profit affiliate the Foundation for Investor Education, is a consumer-focused Web site that offers objective advice, tools and resources to consumers who are exploring various financial goals.

The SIA retirement study uses current measures employing data sources such as the Federal Reserve’s triennial report, the 2004 Survey of Consumer Finances as well as the Federal Reserve’s quarterly Flow of Funds Accounts and other sources to assess the adequacy of retirement savings. The full study is written up in the June 26th edition of SIA Research Reports.  For a copy of the full research report (http://www.sia.com/research/html/research_reports.html)

 The Securities Industry Association brings together the shared interests of more than 600 securities firms to accomplish common goals.  SIA's primary mission is to build and maintain public trust and confidence in the securities markets.  SIA members (including investment banks, broker-dealers, and mutual fund companies) are active in all U.S. and foreign markets and in all phases of corporate and public finance.  According to the Bureau of Labor Statistics, the U.S. securities industry employs nearly 800,000 individuals, and its personnel manage the accounts of nearly 93 million investors directly and indirectly through corporate, thrift, and pension plans.  In 2005, the industry generated an estimated $321.8 billion in domestic revenue and an estimated $474 billion in global revenues.  More information about SIA is available at: www.sia.com.