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Even Wealthy Face Retirement Shortfall

A study offers some grim news about how prepared Americans are for retirement.
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BOSTON (TheStreet) -- For those stressed out by the prospect they may not have enough money saved for retirement, a study released this week by the Employee Benefit Research Institute will be of little comfort.

The study, based on an analysis of 24 million participants in 401(k) plans, is touted as the first time a national retirement model has projected when different groups, based on age and income, are likely to exhaust their retirement savings. The conclusion: "Dramatically high percentages of Americans -- even in the upper-income categories -- are likely to run short of money after 10 or 20 years of retirement."

Nearly half of "early" baby boomers -- those on the verge of retirement, ages 56 to 62 -- are at risk of not having sufficient income to pay for basic postretirement expenditures and medical expenses. The percentage drops for "late" boomers (ages 46 to 55) to 43.7%. Generation X (born 1965-74) has a 44.5% chance of running out of money based on savings projections.

The study factored in a variety of retirement income sources, including 401(k)s, IRAs, pensions and Social Security benefits. Savings were calculated on an assumption stocks would return 8.9% and bonds 6.3% each year.

Dividing its national sample into four preretirement income categories, ranging from poorest to wealthiest, the study concluded that almost two-thirds (64%) of Americans in the two lowest income levels will be running short after 10 years in retirement. After 20 years of retirement, nearly a third of those in the next-to-highest income level won't have any money left.

Even the wealthy can't count on their money lasting a lifetime. According to EBRI's projection, 13% of the wealthiest quartile of Americans are in danger of churning through their savings within 20 years of retirement.

"Policy makers need to understand what percentage of the population is likely to fail to achieve retirement security under current conditions," says Jack VanDerhei, principal author of the study. "Even more important is to identify which of those households still have time to modify their behavior to achieve retirement security, and how they need to proceed."

The institute touts itself as a nonprofit and nonpartisan supporter of employee benefits plans. At its creation in 1978, members acknowledged "their common business interests will be furthered" by the work, but vowed to "function strictly in an objective and unbiased manner." Its findings have generally been accepted at face value.

As bad as the projections are, they show that most American's are in slightly better shape than when EBRI conducted a similar, though less comprehensive, study in 2003. At that time, more than 59% of early boomers and 55% of late boomers were deemed to be inadequately prepared for retirement. The current study credits the adoption of automatic enrollment and diversified default investments in 401(k) plans as improving prospects.

"Unfortunately, from our perspective, the numbers aren't really a surprise," says Chris Hobart, CEO of

Hobart Financial Group

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in Charlotte, N.C., a firm specializing in clients who are either retired or preparing to be. "We see people coming through our door every day who are spending way too much and have way too little in savings."

A particular challenge is getting people to accept their situation, Hobart says. While sifting through marketing materials, as he must occasionally for office projects, he found hints that reality was seeping in.

"I was recently looking through some stock photos and there are all these pictures of retired people who are happy, on the beach, hugging each other, riding bikes and all that," he says. "But I also noticed that there are now a lot more pictures of people who look extremely depressed, like something is going wrong. I think reality is setting in. People are realizing that retirement may not be the beach house and the mountain house. For a lot of our population, it may be merely trying to survive, and that's not a comforting thought."

Hobart says some of Americans' spending, saving and investment habits are misguided.

"Many of the baby boomers might not be in the highest income quartile, but they tried to invest in things that were high risk to be in that top quartile," he says. "We call it the 'buy and hope' strategy. People invest in something and just hope that something good happens. In this current economy, retirees and preretirees can't depend on that. They need to have a structured plan for income and build their own form of a pension in order to be able to successfully retire."

-- Reported by Joe Mont in Boston.


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