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Using the affordability index to determine if you are ready to retire

Business Commentary

Posted: June 27, 2008 3:04 a.m.
Updated: August 28, 2008 5:01 a.m.
With the current economic problems and energy costs Americans are faced with currently and for the immediate future, it is making it harder than ever to make or continue retirement planning contributions.

Existing retirees have a bigger problem, which is to continue their current withdrawal levels when they see their assets diminishing and everyday cost of living increasing.

Retirees want to increase their withdrawal percentage to meet increased expenses, when realistically they need to reduce withdrawals to protect their principal.

The following is information previously reported that was written in 2006 which addresses the problem of retirement affordability that is more problematic today than it was two years ago.

An index that measures the percentage of households at risk of being financially ill-equipped for retirement was launched in Washington, D.C. in June 2006. It was touted as the most comprehensive measure of its kind by many in the financial world.

The Index was developed by the prestigious Center for Retirement Readiness at Boston College through a grant. It is the nation's first comprehensive benchmark for retirement preparedness.

The index calculates what level of income could be generated from current household assets - in terms of a percent of pre-retirement income - and compares that income level to a benchmark considered adequate for retirement. Think of it as giving Americans a "pass-fail" grade for retirement readiness. Not only does it heighten awareness of the need for more aggressive retirement saving, thereby making consumers more receptive to the guidance and advice of financial planners.

The Index helps individuals by:

* Getting lawmakers to change public policy to help bolster consumers investing for retirement and to create more "automatic" mechanisms in 401(k) plans

* Encourage business leaders to promote higher levels of participation in their group plans and to adopt personnel policies that foster hiring and retaining older workers

* Trigger a stronger consumer commitment to bankrolling retirement through individual or at-work savings plans and to consider the possibility of working longer

The overall goal of the index drives home the notion that saving for retirement is vital, a mission of both financial institutions and the Center for Retirement Research.

The Center's director, Alicia H. Munnell, said, "The more people think ahead, the more they can avoid unpleasant surprises and painful adjustments as they approach retirement."

Research has shown many Americans seem to take the "I'll worry about it tomorrow" approach to retirement savings. While current retirees may be doing well, the outlook for retiring Baby Boomers and Generation Xers is not as rosy. Fifty-eight percent of Americans born between 1946 and 1954 (the early boomers) will not have adequate retirement income. For Generation Xers (those born after 1964), the percentage jumps to 68 percent.

For those who have the "spend now and save later" philosophy, consider these findings from the center:

* The average American consumer has $9,000 in credit card debt.

* Only 25 percent take part in their company sponsored retirement plan. And only 10 percent of those contribute the maximum.

* Less than 50 percent of workers are covered by employer-sponsored retirement plans. A figure that hasn't changed much since 1973.

* During the past decade, personal income has increased 20 percent, while personal spending jumped 50 percent.

* Personal savings hit an all time low in 2005 - falling below zero from June to September excluding pension plan contributions.

These statistics illustrate some of the biggest financial issues facing Americans but stop short in helping individuals to assess their personal level of retirement readiness. And, with our current financial crisis and energy costs escalating, Americans will find it harder to find discretionary funds to invest for their retirement.

There are many tools to help consumers make a plan. The best is working with a financial planner and tailor making a plan that will work for you. Remember, "no one plans to fail, many fail to plan."

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment, which is located in Santa Clarita. His column represents his own views and not necessarily those of The Signal.


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