WSJ: Have You Learned Your Lessons Yet?

Over the weekend, the Wall Street Journal published a very interesting and SOBERING survey written by Glenn Ruffenach on lessons learned in the past year during the financial crisis. It was done in a Q&A format spanning 6 categories: Bearing Up, Nest Eggs, Health, Savings & Spending, and Social Security & Looking Ahead. Some of the statistics will pose question of sample size error and is not representative of national averages, but it gives one a sense of what the future may hold in retirement planning, maintaining one’s standard of living in retirement, and healthcare, given the financial crisis and aging of the US population.

I summarize for you the findings of the survey:

BEARING UP:
1) In 2008, NOT a single asset class that is theoretically uncorrelated to stocks rose in value against the S&P 500 (-37%) and hence invalidated the theory of diversification.

2) For the 10-year period ended Sept 30, stock as measured by the S&P 500 delivered an annual average return of -.2%, while bonds, as measured by Barclays Capital US Aggregate Index, delivered an annual average return of 6%.

3) 31% of the surveyed workers (done by Bankrate Inc) said that they still plan to retire on their original schedule, in the wake of the financial crisis. 20% of the workers said they plan to leave office between 1 and 5 years later than first planned; 18% said they will never be able to retire; while 13% said 6 to 10 years later than planned.

NEST EGGS:
1) 26% of workers age 55+ have savings and investments (ex homes and pensions) that total $250,000 or more (done by Employee Benefit Research Institute in DC). 59% have less than $100,000.

2) 47% of workers ended up leaving the work force earlier than expected due to health problems or disability (42%) and changes to their company, including downsizing (34%). If these workers are taping into inadequate savings or tapping into savings earlier than expected, they will be unable to maintain their standard of living in retirement.

3) 80% of workers (out of 1.2 Mil workers in 1,500+ retirement plans – U. of Michigan Survey) NEVER made any changes in their 401K in the past 2 years. 11% made one trade. There is no evidence of shifting risk with age.

4) At the end of 2007 (right before the market really crashed), 43% of workers age 56 – 65 had 70% or more of their 401K funds in stocks. 22% of older workers had 90%+ in stocks. Concentration of risk is high.

5) 20% of workers age 55-64 in employer retirement programs made the maximum contribution to their acct in 2008; while 13% age 50+ took advantage of catch-up contributions (done by Vanguard with 3 mil participants).

HEALTHCARE:
1) How much savings will men and women (greater longevity) need respectively for a 50% chance of covering the cost of healthcare premiums (for a Medigap policy + Medicare B and D), and out-of- pocket drug expenses in later life, assuming one retires at 65 in 2009 WITHOUT employer health benefits, starting with $900 out-of-pocket healthcare cost in year 1? ANSWER: Men = $86,000, WOMEN = $125,000.

And if you want to cover 90% of covering healthcare cost, you will need this much savings: Men = $177,000, Women = $221,000!!! Don’t underestimate how much your healthcare expenses will cost you.

2) The age group that has the highest obesity rates in the US is between 40 – 59, 40% of this group is considered obese! Obesity will cause health complications which will eat into your healthcare costs. Start eating and exercising right.

SAVINGS & SPENDING:
1) Only 44% of workers surveyed have tried to calculate how much money they will need to save for a comfortable retirement. Same 44% said they guessed at how much money they will need in later life!

2) It is estimated that one needs 80% of your pre-retirement income to have a successful retirement; the caveat is your living standard.

3) 43% of households age 65-74 have housing debt.

SOCIAL SECURITY:
1) In retirement, Social Security will likely replace 33% of your pre-retirement income. Will your savings and assets be sufficient to generate the balance?

2) Among the best ways for a couple to maximize Social Security payments over their lifetime is for the lower-earning spouse to claim benefits early (at age 62) and the higher-earning spouse to claim benefits later (at age 70), the 62/70 strategy, depending on the couples.

LOOKING AHEAD:
1) Working longer is now the single best cure for a battered nest egg! This will maximize your social security payout and hopefully allow your retirement savings to grow.

2) The economic crisis is not really prompting major changes in strategies to help people build and protect their nest eggs; people don’t know what asset classes to diversify into.

In conclusion, Mr. Ruffenach suggests you write out a financial plan; save at least 10% of your paycheck; diversify your holdings; keep debt to minimum; spend less than you make; build a cash reserve; insure your risks where possible; and watch your health. Seems like sound advice to me.