A Look at the State of Retirement

The National Retirement Risk Index measures how many Americans will be able to maintain their standard of living after retirement. Are you at risk? Find out in this episode of Motley Fool Answers, as Motley Fool personal finance expert Robert Brokamp goes right to the source, with special guest Geoffrey Sanzenbacher from the Center for Retirement Research at Boston College.

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This video was recorded on August 31, 2021.

Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick, joined as always by Robert Brokamp, CFP, MVP, homecoming king, and personal finance expert here at The Motley Fool. He really was the homecoming king. In this week’s episode, we warned you we were changing up the show’s format a bit, and here’s another change. Rather than bring you a mailbag episode the last week of every month, we’ll aim to bring you interesting interviews with outside experts in the field of retirement, money, finance, and honestly, whatever we want to talk about. This week, Bro sits down with Geoffrey Sanzenbacher, economist with the Center for Retirement Research at Boston College. They’re going to talk about the big trends in retirement today, as well as what to do about social security. All that and more on this week’s episode of Motley Fool Answers.

Robert Brokamp: Long-time listeners know that one of my go-to sources for academic research into financial independence is the Center for Retirement Research at Boston College. Beside the steady stream of studies and analysis, both on their main website and their Squared Away blog, the center also created the national and retirement risk index. A measure of the percentage of Americans that will be able to maintain their standard of living once they leave the working world. Here to talk about the index and plenty of other topics is Dr. Jeff Sanzenbacher, Associate Professor of the practice of economics and a research fellow at the Center for Retirement Research at Boston College. Dr. Sanzenbacher, welcome to Motley Fool Answers.

Geoffrey Sanzenbacher: Thanks so much, Robert.

Brokamp: Let’s start with the national and retirement risk index. What is it and what’s it saying about retirement preparedness in America nowadays?

Sanzenbacher: Yeah. The national retirement risk index is an index that basically takes where people are on their life track for retirement savings and projects them out to the time when they’re going to retire. It looks and see are they likely to have enough money to maintain their standard of living. If they do have enough money, then we would say they are not at risk. If they don’t have enough savings so that it looks like when they get to retirement, they’re going to fall short and not be able to keep living how they are, we would say they are at risk. The index shows that about half of people are at risk of not having enough wealth to maintain their standard of living once they retire.

Brokamp: That’s generally speaking at the retirement age of 65. Is that around the average nowadays?

Sanzenbacher: That is actually around the average. Nowadays, a lot of people, like any average, a lot of people don’t make it, a lot of people work longer, but yeah, the average is right around 65.

Brokamp: What happens to the other half? Are they still retiring and then they figure out later that maybe they shouldn’t have?

Sanzenbacher: Yeah, I mean, I think we’ve looked at some data on what happens to people who reach that threshold without enough money, and there are a couple of things that show up. Their health outcomes appear worse, slightly more likely to die within the study period. More likely to report being in poor health. They also report being less satisfied with their retirement, which makes sense. If you think about the goal of retirement savings is to be able to maintain your standard of living once the major source of your earnings is gone. When we say you don’t have enough wealth to retire, that means you retire and then your standard of living drops from what you’ve been used to your whole life. Of course, you’re going to be dissatisfied. That’s really one of the main things we see.

Brokamp: Do we know much about the process by which people make the decision to retire? I mean, to me, it’s amazing when people choose to quit before they have sufficient resources. Are they getting bad advice? Are they underestimating how much retirement costs? Or are there just too many people saying, “Okay, I’m 65, it’s time to retire.” That really didn’t do much analysis?

Sanzenbacher: I think a lot of that. I mean, I think if you look at when people retire, there are these huge spikes at 62 and 65, 62 being when you can first claim Social Security, 65 being when you can first get Medicare. I think those benchmarks play a big role in people’s thinking. If there’s one thing — I hate to admit this as a researcher — but if there’s one thing I’ve learned, doing lots and lots of regressions on people’s retirement decisions, it’s we can’t explain a whole lot. We might explain 25-30% of people’s decision-making. As an econometrician that’s not so bad. I mean, 25-30% of what people do is not the worst thing in the world, but that means there’s 70% we really don’t know. I think a lot of it comes down to how much does someone hate their job or likes their job. That’s obviously hard to capture in data. I think a lot of it comes down to these rules of thumb based around these ages that we’ve drilled into our heads as being important ages. I think some of the more salient things that people do consider is their health. Are they well enough to keep working? Spouses play a big role. If your spouse retires, you’re more likely to retire. Those are things we can measure. I think one of the big things that we really can’t measure are these soft job characteristics. Someone hates their job, they don’t like their boss, they’re stressed out. Those are really just hard to pick up in economic data, so I think that plays a big role, too.

Brokamp: One solution for people who don’t have sufficient resources is to work longer. A previous Center for Retirement Research publication suggested that 85% of workers would be prepared if they worked to age 70. Is this what we should be aiming for as a society, is 70 the new 65 when it comes to retirement?

Sanzenbacher: I wish that it was Robert, but there’s an inequality in who can work longer. We did a study, a colleague and myself to the study looking at variation and how easy or difficult are jobs to do for a while. One that consistently comes up is, first of all, and this maybe goes without saying, blue-collar jobs are much harder to do into your 60s than is a white-collar job on average. The reason for that is pretty simple. A lot of those jobs use physical strength and physical strength does decline with age. On top of that, I think the ability to switch jobs to find and create something that’s both meaningful but also easy to do is easier for white-collar workers who might have more options by the time they reach that age. On top of that, I think white-collar workers have more options to self-employed consulting, things like that on the side and maybe keeping them in the labor force, but aren’t like a full-time job and yet still pay pretty well. We see a lot of independent contracting in the form of consulting among older white-collar workers. I think all those things basically mean that there is this inequality in who can work longer.

On top of that, that inequality is really correlated with wealth inequality. The people who maybe need to work the longest, the most who have the lease savings a lot of times, are the very same people who can’t really work longer because they’re in a physical job or they’re in poor health. There are these cross-correlations that I think are dangerous for people.

Brokamp: We’ve talked before on the show about how many people end up retiring sooner than expected.

Sanzenbacher: Yeah.

Brokamp: A lot of that, the No. 1 reason is health. People think, “Oh, yeah, I am going to be able to work until 65 or maybe 67 or 70, no problem.” Then something happens and they are not able to do that.

Sanzenbacher: Yeah, health is by far the biggest measurable reason we could find. Again, it’s one of those situations where we did a study saying, “How do we explain why people retire before they plan?” If you ask people in their early 50s, they’ll say, “Yeah, I want to work ’till 65. I want to work ’till 66.” A lot of people don’t make it. We did a study looking at why they don’t make it. Again, health was a really big reason. Another big reason was they lost their job. They got laid off and couldn’t find a new job. But we also couldn’t explain a lot of it. Again, we couldn’t explain 70% of it. We have this, well, we’re doing a pretty good job statistically, it’s not bad. But at the same time, it leaves a lot of uncertainty as far as people have this plan, not when they’re 30, I mean, they’re in their 50s. They should have a number in their head that’s so realistic. Yet, a lot of people don’t make it and we don’t exactly know why. I suspect it’s some combination of maybe a spouse retired faster than they thought. Maybe they had grandkids and they want to go see the grandkids. Maybe the job they hated more than they thought. But a lot of it is hard to tell, so health, losing a job, are big observed factors, but a lot of it’s stuff we can’t see.

Brokamp: Now I’m sure you’re seeing some of the evidence that’s come out that many people have retired during the pandemic. One report, I saw that estimated maybe 2 million people retired more than they would’ve expected. I guess that’s a combination of maybe people lost their jobs. Also, maybe because the stock market has done well. But certainly, these things happen and people didn’t plan on them happening and then they are at this point in life like, “Well, heck, why not? Why don’t I just retire?”

Sanzenbacher: I think the COVID recession’s interesting because what you typically see during a recession, like everything in life, unfortunately, things that are bad for the economy tend to hit lower-income people worse. Typically during a recession, we see lower-income people retire at a higher rate. I’d put retire in quotes because I think they leave the workforce, maybe not voluntarily. Look a little bit and then say, “You know what? I’m done with this.” That happens to low-income people a lot more during recessions. We were at the COVID recession, we saw it happen to high-income people more than we would expect to. I think you’re right, Robert, I think the stock market is doing well probably plays a role. I think those people may also have been fairly well prepared and who want to go to work if there’s this dangerous virus out there. That’s especially dangerous to you in your 60s. I think that also plays a role. We do see this different pattern during the COVID recession we know we had seen before. One of the things I’m working on with a colleague at the center is doing some work on unretirement. One thing we’re always interested in is how many people unretire? They retired, they thought it was a good idea. They realize that no, it’s not, “The economy is coming back, I can find a job easily” so they unretire. We’re trying to look into that and see if that’s happening in this recession.

Brokamp: Interesting, I look forward to that research.

Sanzenbacher: Yeah.

Brokamp: Theoretically, another solution might be to use home equity, especially since many Americans have more in home equity than they have saved in their 401(k). But how often is that used as a retirement resource and should it be?

Sanzenbacher: Yes, first approximation never. I think it’s very rarely used. I think that it’s always worth noting, as much as we talk about the stock market and as important as that is for retirement, probably a third of workers have nothing in retirement accounts. Probably another third don’t have that much, so their house is by far the biggest asset they have for retirement. You have a top third that maybe has roughly equal amount on both. For that bottom really, 70%, the house is really important. The main two ways, I guess that people can access the house, or maybe three ways. One is downsizing, so people go from the house they had in the 30s, 40s and 50s and downsize to a smaller house and pocket the profit. That is somewhat uncommon. People are really attached to their house. I gave a talk in Newton Massachusetts. It was at a senior center. It was about these options, so one is downsizing, one is doing a reverse mortgage, and one is doing something called a property tax deferral, where you’re just basically using your home equity to pay your property taxes while you’re alive then when you sell the house, it gets paid off. People hated all these things, no one wanted to hear it. I’m not used to a hostile crowd, it was not a happy crowd.

People don’t want to sell their house, they have a lot of memories in their house. People don’t want to take a reverse mortgage because I think somewhat rightfully they don’t quite trust that industry. I think the industry has made a lot of strides over the last couple of years, has done a lot, to reform things like, for example, you have a non-borrowing spouse now. They’ve done a lot to make it easier for that non-borrowing spouse to stay in their house. I think the industry is making strides, but people still don’t trust it. Then the property tax deferral, a lot of times our income is restricted, so that’s a bit of a problem. It seems like a means tested program, and people don’t like that. Also, it is a lien against your house, and people don’t like it. People very rarely use any of these options, which is understandable but also frustrating as someone who sees that as the biggest store of wealth that the typical person has.

Brokamp: Yeah. People do have very emotional attachments to their house and they are very uncomfortable with any concept that’s similar to spending your house, because then what’s going to happen.

Sanzenbacher: Right.

Brokamp: But clearly it’s going to be the lifeline for millions of Americans.

Sanzenbacher: I think the one way it is used is like an emergency, or something really bad happened, you use the house as your lifeline. As economists, we want to see people use their wealth in a linear, nice, orderly way. As an economist, I pull my hair out saying, “Come on, use this store of wealth” but as a person, I know that the economist is a crazy one, because people do have these attachments to their homes and that’s normal, I think. The economist in me is frustrated, but the person does get it.

Brokamp: Yeah. Besides, running out of money, another risk in retirement and one that I don’t think is discussed enough is cognitive decline as we age. We’ve all had experiences speaking with older relatives and you noticed how there’s slipping and then sometimes slipping a little bit and sometimes maybe on the road to full-blown dementia. How prevalent is cognitive decline in retirement and how does it potentially affect money management?

Sanzenbacher: I think in people’s 60s and even early 70s, it’s probably common as mild cognitive decline. Probably not to comment that will get in the way of financial management resources right away. By the late 70s and 80s, I would say, it becomes quite common. People should be looking for help with managing their money. A lot of times it’s subtle things, people are missing bill payments they never missed before. But it can evolve into full-blown fraud risk and things like that. It’s not just old timers, I think even people who don’t get Alzheimer’s can have enough natural cognitive decline by their late 80s, they’re going to need help.

The good news is most people have help. We do this study where I think about 85% of people have some form of help most of the time, from family. Sometimes from outsiders, most of the time from family. But the problem is that the other 15% are bad off. They’re a lot more likely to miss bill payments, a lot more likely to struggle with hunger, a lot more likely to report not having enough money for basic necessities. Making sure that when you’re in your 60s, or early 70s, when you are able to really plan ahead, do you make sure you have a family member who is ready to help you? Do you make sure you’re not relying entirely on your spouse, who you think you’ll live with forever, but who might pass away before you? Making sure you have a backup plan in that case is really important. I don’t think people really make those plans often enough, so I do think at least considering who would i have help me? Then maybe formalizing that financial power of attorney, are making sure your will is in order, those things are all very smart.

Brokamp: Obviously, Wealth Management had a report on this, and told the story of a woman who is a successful children’s book author and illustrator. Her husband handled all the finances as well as their business and she didn’t know that he went five years without paying taxes, made some bad investments, all due to gradually progressive cognitive decline, and they pretty much lost everything. Most couples, one person does all the financial management and the other person trusts them. There is a point where you have to get other help, everyone, maybe more than one or two people have an eye on what’s happening to the bills, make sure the bills are getting paid or not being repeatedly paid over and over again.

Sanzenbacher: Yeah.

Brokamp: I think it’s also key that people have to accept that this could happen to them. When you dig into the legal community, you find story after story of family members clearly seeing that someone is in trouble, but that person is not willing to accept help, not willing to acknowledge, and not willing to give up control.

Sanzenbacher: Yeah. The taking away the keys conversation, I think is really hard for people. Especially, a lot of times it’s a child helping a parent, and that role reversal is really difficult. Taking away the keys, driving is literally one of the things where this conversation happens pretty early, but financial management is another place where I think it happens, and it’s hard. Social Security does have a program called the Representative Payee Program that can help with that, but it’s a really big step to take because basically it means Social Security is paying the money directly to another person, who’s charged with taking care of the beneficiary. That’s a big step and Social Security doesn’t take it lightly. It is hard to formalize these arrangements, but it’s worth thinking about doing.

Brokamp: Staying on the topic of health. The evidence about the healthiness of retirement itself is actually mixed. Some studies indicate that it is associated with cognitive decline because you lose the intellectual stimulation of work, could lead to social isolation, could lead to depression. Other studies, on the other hand, find that general happiness levels rise after retirement. What’s your take on that? Do you think retirement is good for people?

Sanzenbacher: I tell everyone who listens to me, which does not include my family, unfortunately, does not include my parents especially, but I tell them work as long as you can and are happy working. My sense is the overwhelming amount of literature on health suggests that retirement is associated with worsening physical health. Notwithstanding having a jobs that are very physical, but in general, there’s a study showing that at age 62, there’s a discrete uptick in mortality because there’s a discrete change in retirement. Some colleagues at the Center for Retirement Research just did a research using Dutch data, and they showed that in the Netherlands, there was a change in policy that suddenly changed people’s retirement age, and the people who are affected in a way where they retire later, live longer. My sense is the majority of the evidence is on that side. When you combine that with the idea that working longer helps your financial wellness, my sense is that there’s no way that it doesn’t help your financial wellness. Most of literature says it helps your physical wellness. To me that says just work longer if you can. Like I said, easy advice to give, hard when someone doesn’t feel like working anymore. I’ve been frustrated with every single one of my relatives and in-laws, but I will keep saying it.

Brokamp: I totally agree. I said it in a previous show that I certainly expect to work to age 67, if not longer. But then I come across stories of people who died at age 67 or 68.

Sanzenbacher: Yeah.

Brokamp: Nanci Griffith the folk singer said it like, “Man, I don’t want to wait. Don’t want to save everything until retirement.”

Sanzenbacher: Yeah. I completely understand that. I think again, like the economist in me looks at the numbers and I say, look, if you’re a healthy 67-year-old man, it is worth it. Claiming at 67 or 68 probably maximizes your lifetime benefit from Social Security. Because your life expectancy is probably 85, 86. Of course, not everyone is going to get that life expectancy. You don’t want to miss out on years of retirement and benefits that you might get. I think it is tough. But the economist who says maximize lifetime benefits, that is like 67 years old for a healthy man.

Brokamp: Is there anything about retirement planning either on an individual or national level that you think doesn’t get as much attention as it should?

Sanzenbacher: On the individual level, the big thing that I’ve been thinking a lot about is the decumulation of 401(k)s. We have spent a lot of time trying to understand what’s the best way to give you 401(k). What are the best investment options? How do you get people to say it? Do you auto enrollment, auto-escalation, all these cool features all give money into the system? I don’t think most of you will have a clue how to get it out. It is really hard for people to go into this thing we’ve been building for their whole life. They have this pile of mine that they’ve grown very attached to, they like to look at the balance. They like to feel like it’s there. To go and take money out of that is a completely different experience. It used to be people had pensions. A pension is very much like a paycheck, which is how we all live. We’re used to the idea that I get a paycheck every month or every two weeks and I take that and I spend it and I save a little bit of it and then I go on and that’s where more money comes. But the 401(k) is the opposite of that. You’ve got a big pile of money that you got to choose how to draw it down. They’re obviously rules like when you start at age 70, you got to start pulling money out. But people don’t know how to do it. I think as a society, we should be thinking harder about how do we do this. People don’t want to buy annuities. Again, it’s like using your house, I think people should do it. People don’t like annuities.

I basically say a lot of things, people don’t listen to you, buy annuities, [laughs] use your house, delay retirement. No one listens. But those are all reasonable things to do. But on the national level, something that has really been driving me crazy is Social Security. For a lot of people, Social Security, probably a third to a half, Social Security as their main source of retirement income. We know that 12 years from now benefits are going to drop by 20% if we don’t do anything. I think that if the past is any indication in 2032 we’ll start talking about it in 2033 we’ll do something a month before it’s done, but I do worry that the something we do will be damaging that some people maybe unintentionally. One of the things that of course, is always talked about is pushing back the full retirement age, which is a reasonable thing probably you talked about doing. But it does hurt those people who can’t extend their careers, more than it hurts people that can extend their careers. That means basically blue-collar workers or disproportionately people of color are going to suffer relative to white-collar workers. I really do think having that discussion a little bit earlier can help us talk about some of the creative ways we can deal with it. Instead of just doing what I think will happen, which is in 2033 they’ll increase payroll tax by a percent, and increase FRA by two years and we will move on. But I don’t know if that’s the best way. I would like to have the conversation now. Nationally, that’d be what I’d like to see.

Brokamp: FRA stands for full retirement age, of course.

Sanzenbacher: Absolutely.

Brokamp: I appreciate all your comments about moving the age back is difficult for some people. I definitely think it makes sense to move up that minimum age of 62.

Sanzenbacher: I do, too.

Brokamp: If you are unable to work, that’s a disability issue.

Sanzenbacher: Yes. We have a program for that, yes.

Brokamp: But as you pointed out, actually this recently changed, but 62 was the most popular claiming age just because it’s there.

Sanzenbacher: I think it just changed, but I think it was forever. I think it’s still pretty much like a tie with I think 65 probably. Sixty-five is not a year, it’s Medicare, it’s not anything to do with Social Security anymore, it’s the old full retirement age. But yeah, it is. I agree with you on that I think pushing up early age and I actually think increasing the full retirement age makes sense. But if for no other reason people are living longer. But it’s worth noting that people are living longer unequally, too. I think thinking a little bit about how we do this in a way that maintains the purposes of the program is worth doing, although I also agree it probably needs to be done somehow.

Brokamp: Final question here whenever I talk with a retirement expert I’d like to close the interview by asking about their own plans. What does retirement look like for you? Obviously, you are going to work as long as you can. Are you going to keel over your desk at Boston College there one day?

Sanzenbacher: I’m very lucky in that I do a job that I absolutely love. It’s hard to imagine retiring from, I teach college because, if you ask me, it’s like a great job. But what I can see doing is phasing out where I teach a class or two for income and to keep myself engaged with the school where I’m not using a full time slot or I’m moving out a little bit like that. Because I do think that working full-time well into my 70s probably isn’t a goal of mine, but I would like to work into my 60s full-time, well into my late 60s and then probably transition in teaching a class or two will be great if that’s still an option for me. That would be an ideal situation for myself. But certainly, having a job that isn’t physically demanding. Fortunately, we all experience cognitive decline. But the things that we know and I’ve known our whole lives are the things that stick with us the longest. If you teach a microeconomy class, that hasn’t changed since Adam Smith that looks like I knew forever. It is easier across econometrics, that’s a little harder because it does change over time. Hopefully, I’ll be able to teach a class that it’s stuff that really is the bedrock of the discipline.

Brokamp: Our guest today was Dr. Jeff Sanzenbacher, associate professor of the practice of economics and a research fellow at the Center for Retirement Research at Boston College. Jeff, thank you so much for joining us on Motley Fool Answers.

Sanzenbacher: Yes, thank you. That was great.

Southwick: Well, that’s the show. It’s edited quickly by Rick Engdahl. Our email is answers@fool.com. For Robert Brokamp, I’m Alison Southwick. Stay Foolish everybody.

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