Is Retirement Still Possible?

June 1, 2009

Jean SetzfandDirector, Financial Security

AARP

Discussion Topics

• About AARP

• New Retirement Realities– Background– Retirement Accounts– Employment of Older Workers– Healthcare Cost– Home Prices

• AARP Priorities & Resources– Social Security – Economic Security– Healthcare

About AARP

• Nonprofit, nonpartisan membership organization for people 50+

• Over 40 million members (approximately 50% of the membership are still working)

• Offices in all 50 states and the District of Columbia, Puerto Rico, and the U.S. Virgin Islands

• Vision: A society in which everyone ages with dignity and purpose, and in which AARP helps people fulfill their goals and dreams.

AARP Members

• 78% of AARP members report that they “always” vote in presidential elections compared to 68% percent of AARP non-members.

• 37% of AARP members identify as Independent or “leaning” voters compared to 32% percent of AARP non-members.

• 78% of AARP members report being most interested in economic and social issues (such as jobs and health care) than other issues (such as morality issues and foreign affairs) compared to 74% percent of AARP non-members.

• 92% of AARP members think the President should “work in a bipartisanship manner to get things done, even if it means some compromise will be necessary” compared to 85% of AARP non-members.

New Retirement Realities

• Individuals are more responsible for their retirement security

• Experience with the realities of risk exposure

• Impact of the market downturn:– Retirement Accounts– Employment of Older Workers– Healthcare Cost– Home Prices

Different Age Groups, Different Recessions

• The recession’s impact has been felt by all:

– Workers and their families (both young and old)

– Retirees

• Adults 65 and older—“who have already retired and downsized their lifestyles—have escaped its full fury.”

• Younger adults have taken the worst lumps in the job market, but remain relatively upbeat about their financial future.

• Adults in late middle age (50-64) “have seen their nest eggs shrink the most and their anxieties about retirement swell the most.”

Source: Pew Research Center, Older Adults and the Economy Survey, April 2009.

Middle Aged Workers Feeling the Squeeze

50 – 64 year olds

• 75% say that the nation’s current economic problems will make it more difficult for them to afford retirement.

• 66% say they lost money in mutual funds, individual stocks or 401(k)-type accounts.

• Of those with losses, 2 in 10 say they lost more than 40% of their investments value. Nearly 4 in 10 say they lost 20% to 40%.

• 59% cut back on spending in the past year.

• 21% had trouble affording medical care in the past year.

• 22% are “very satisfied” with their financial condition.

• 58% say recession has caused stress in the family.

Source: Pew Research Center, Older Adults and the Economy Survey, April 2009.

Adults Age 65+

• 26% of retirees say their retirement income declined in the past year [71% said it did not]– Retirees with higher family income more likely to report that their

income declined [35% of those with income of $50,000 or more vs. 20% of those with family income of $20,000 or less]

• Older adults less likely to have cut back on spending than younger adults and are more likely to be confident that they have enough to live on in retirement.

• But there is a significant race gap among older adults [that does not exist among younger adults]– Percent of adults age 65+ who have cut spending in the past year

because money was tight: whites 34%, blacks 42%

– Percent that are confident they have enough to live on in retirement: whites 75%, blacks 59%

Source: Pew Research Center, Older Adults and the Economy Survey, April 2009.

Percentage of 65+ Receiving Income From Specified Source, 2007

89%

53%

23%20%

12%

5% 3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Social Security Asset Income Private Pension Earnings Public Pension SurvivorsBenefits

SSI(Supplemental

Security Income)

Veterans'Benefits

Source: U.S. Census Bureau, Current Population Survey, 2008

Sources of Retirement Income

Wealth of a Typical Household Approaching Retirement

Source of Wealth Amount in Dollars Percent of TotalSocial Security 298,800$ 44%Primary House 138,600 20%Defined Benefit 122,100 18%401(k)/IRAs 50,500 7%Financial Assets 29,600 4%Other Non-Financial Assets 21,000 3%Business Assets 15,900 2%Total 676,500$ 100%

Sources: Center for Retirement Research, 2007 Survey of Consumer Finance

0

20

40

60

80

100

1979 1983 1987 1991 1995 1999 2003 2007

% P

riva

te-S

ecto

r W

orke

rs

DC Provides Primary Coverage

DB Provides Primary Coverage

Source: U.S. Dept. of Labor, Employee Benefit Security Administration; Center for Retirement Research at BostonCollege; U.S. Dept. of Labor, Bureau of Labor Statistics.

Changes in Retirement Plan Participation (Shift from DB to DC), 1979-2007

Retirement Savings in 401(k)s/IRAs

Sources: Center for Retirement Research, 2007 Survey of Consumer Finance

Percent of 401(k) Participants Making Maximum Contributions

0.6%1.7%

3.0%4.9%

29.9%

7.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

20-40 40-60 60-80 80-100 100+ All

Thousands of Dollars

Retirement Savings in 401(k)s/IRAs

401(k)/IRA Assets by Age

29,000

49,000

73,000

35,000

60,000

78,000

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

35-44 45-54 55-64

Age Group

Ass

ets

Acc

um

ula

ted

2004 2007

Sources: Munnell and Sunden, 2007 Survey of Consumer Finance

Retirement Savings in 401(k)s/IRAs

Source: Vanguard 2008

Percent of 401(k) Balances in Equities, by Age

71%

81% 82%77%

67%

55%

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

<25 25-34 35-44 45-54 55-64 65+ All

Age Groups

Per

cen

t in

Eq

uit

ies

Losses to Retirement AccountsChange in Average Account Balances From Jan. 1, 2008–April 10, 2009, By Age and Tenure, Among 401(k) Participants With Account Balances as of Dec. 31, 2007

Sources: 2007 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; 2008 and 2009 account balances: EBRI estimates. The analysis is based on all participants with account balances at the end of 2007 and contribution information for that year.

38.70%

21.90%

11.90%8.80%

13.20%

-8.50%

-12.40% -11.70%-15.40%

-19.70% -18.70%-22.00% -21.50%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

1-4

5-9

10-19

20-29

25-34 35-44 45-54 55-64

Age

Job Tenure (in years)

Recovery Time At 5% equity

rate of return2 - 5 years

At 0% equity rate of return

2.5 - 9.5 years

Working Longer

0%5%10%15%20%25%30%35%40%45%50%

1950

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Labor Force Participation Rates of Persons Aged 55+, 1950, 1985, and 1990-2008

Source: U.S. Bureau of Labor Statistics, Handbook of Labor Statistics, 1985; Employment and Earnings, January issues, 1986-2009.

Working Longer

Labor Force Participation Rates of Persons Aged 65-69, 1985-2008 (in percentages)

Year Both Sexes Men % Increase Men

Women % Increase Women

1985 18.4 24.4N/A

13.5N/A

1995 21.8 27 10.7% 17.5 29.6%2005 28.3 33.6 24.4% 23.7 35.4%2008 30.7 35.6 6.0% 26.4 11.4%

Source: Bureau of Labor Statistics

Working Longer

• Workers say that they expect to continue working in retirement—upwards of 69% depending on the survey.

Making ends meet and need access to health care (for pre-retirees) are cited as the most important reason for continued work.

• A substantial proportion of workers end up retiring or leaving the labor force earlier than anticipated due to reasons beyond their control. In the end, more workers say they expect or want to work in retirement than actually do.

Unemployment Rate, Men and Women Age 55+

December 2007-April 2009

3.1% 3.3%3.5%

4.5%

5.1%5.3%

6.0%6.3%

6.7%

5.8%5.4%

3.9%4.3%

5.3%

6.4%

Dec-07 Mar-08 June Sept Dec-08 Jan-09 Feb-09 Mar-09 Apr-09

Men Women All

Number of Unemployed Men and Women Age 55+April 2008 – April 2009

430366

839

1,849

745

1,022

Men Women All

April 2008 April 2009 April 2008 April 2009 April 2008 April 2009

Un

emp

loy

ed(i

n t

ho

usa

nd

s)

Over the past year, one million more unemployed 55+

Other Employment Indicators

• Older workers are not just experiencing higher rates of unemployment, more are:

– Working part-time for economic reasons

• Working part-time for economic reasons has more than doubled among older workers since the start of the recession. In April 2009, 5% of workers age 55+ were working part time because they could not find full-time work, compared to only 2.4% in December 2007.

– Discouraged and exiting the labor force

• People age 55+ represent 18.7% of the labor force, but 20.7% of discouraged workers (not actively looking for work in the prior 4 weeks because: thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination.)

– Experiencing longer periods of unemployment

• Once unemployed, older workers continue to remain out of work longer than their younger counterparts. In April, the average duration of unemployment was 26.6 weeks for the unemployed aged 55 and over and 22.9 weeks for those under age 55.

Healthcare Coverage for People Age 50-64

• 45.7 million (15.3%) people of all ages were uninsured and 7.1 million adults (13%) age 50-64 were uninsured in 2007.

• 1.9 million more 50-64 uninsured than in 2000, representing a 36% increase.

• Baby Boomers represent nearly 20% of the population within the next 7 years, finding a common-sense solution for this group is critical to holding down costs and improving health and financial security.

• 45% of workers lack confidence that they will have enough money to pay for medical expenses during retirement.

Medicare Coverage

• Medicare provide health coverage to 44 million people 65 and older, people with disabilities and people with end stage renal disease.

• People on Medicare spend about 30% of their incomes, on average, on out-of-pocket health costs – six times more than people with employer coverage.

• Medicare rarely covers the costs of long-term care, which is very expensive. The average cost of a semi-private room in a nursing home is almost $70,000 per year. For assisted living facilities, the yearly cost is over $36,000.

Out of Pocket Healthcare Cost

Average Out-of-Pocket Health Care Spending, for All Medicare Beneficiaries Age 65+

$3,455

$5,144

$8,459

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

2003 2011 Estimate 2021 Estimate

Source: The MetLife Market Survey of Nursing Home & Assisted Living Costs, October 2008.

• Healthcare costs continue to rise when key sources retirement income remain flat or decrease. Social Security benefits will receive no COLA increases in 2010, 2011 and a modest increase in 2012.

Home Prices

42%

35%

43% 43%

55%

43%

14%

47% 46%

29%

23%

38%

50%

0%

10%

20%

30%

40%

50%

60%

All

55-6

1

62-7

1

72-8

182

+W

hite

Black

Hispan

icOth

er 1st

2nd

3rd

4th

Age Race / Ethnicity Income Quartile

Inflation-Adjusted Growth in Median Home Equity: 1998-2006 Home Owners Ages 55+

Source: Zedleswski, Cushing-Daniels, and Lewis (2008), Health and Retirement Study Data

Change in Income from Reverse Mortgages

18%

12%

20%

36%

18%

11%

19%

37%

28%

20%

10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

All

62-7

1

72-8

182

+W

hite

Black

Hispan

ic 1st

2nd

3rd

4th

Age Race / Ethnicity Income Quartile

Potential Median Change in Income from Reverse Annuity Mortgages Homeowners 62+, 2006

Source: Zedleswski, Cushing-Daniels, and Lewis (2008), Health and Retirement Study Data

Is Retirement Still Possible?

• The financial downturn has undermined retirement security for many, especially those near retirement and recently retired.

• It has exposed the inadequacy of our current retirement income system.

• Retirement is possible, but solutions are needed to prevent further erosion.

AARP Priorities: Healthcare

• AARP Six Overarching Goals for Healthcare Reform:

– Guaranteeing access to affordable coverage for Americans age 50-64;

– Closing the Medicare Part D coverage gap or “doughnut hole”;

– Preventing costly hospital readmissions by creating a follow up care benefit in Medicare to help people safely transition home after a hospital stay;

– Increasing federal funding and eligibility for home and community based services through Medicaid so older Americans can remain in their homes and avoid more costly institutions as they age;

– Creating access to generic versions of biologic drugs used to treat cancer and other serious diseases to reduce the price of these costly treatments; and

– Improving programs that help low income Americans in Medicare afford the health care and prescription drugs they need. 

AARP Priorities: Social Security

• Social Security solvency package should provide:

– Guaranteed benefits for life

– Adequate guaranteed benefit for future generations

– Protection from lost wages resulting from death, disability and retirement

– Benefits linked to pay and tenure

– Universal participation

– Progressive benefits to replace greater share to lower-wage earners

– Inflation adjustments for beneficiaries

– Adequate early retirement benefits

– Financial integrity by requiring contributions from both employers and employees

AARP Priorities: Economic Security

• Retirement Security– Enact reforms to expand access, improve adequacy and

security, and strengthen protections

– Promote the development and adoption of more effective retirement plans by the financial services industry and employers and influence industry practices toward 50+ investors

– Deliver information, education and guidance that leads to better retirement financial decisions by individuals

• Workforce– Encourage the adoption of employer policies and practices that

afford 50+ workers more and better workplace options.

– Ensure that 50+ workers have the skills needed and the opportunities available for fulfilling employment.

AARP Resources

Consumers:

• www.HealthActionNow.org

• www.AARP.org/RealRelief (June 11th Consumer Webinar)

• www.AARP.org/NoFreeLunch

Employers:

• www.RetirementMadeSimpler.org

• www.aarp.org/money/work/employer_resource_ctr/

• www.AARP.org/Workforceassessment