“We must all hang together, or assuredly we shall all hang separately.”
That famous Benjamin Franklin quote came to mind as I read a paper by three researchers who’ve made important contributions to the study of retirement finance — James M. Poterba at M.I.T., Steven F. Venti at Dartmouth, and David A. Wise at Harvard.
What could possibly connect a statement from a revolutionary at the signing of the Declaration of Independence and an academic study of pre-retirees financial resources?
Lots. The paper shows what amounts to two separate and distinct Americas. One is the large portion of our population— at least half— that enters retirement, often unwillingly, with very limited resources and struggles every day thereafter. The other is a smaller group that we see pictured in magazines offering long cruises, well landscaped retirement communities, and other signs of affluence— the top 30 percent that is doing OK to very, very well.
If the two groups can’t figure out a way to coexist, the figures make it clear that most people are facing a future of strife and shortage while those who are better off will feel they are targeted by a growing horde of tax hunters. Or maybe just hunted.
What makes this research different is that it tries to put a value on things like Social Security and pensions. This isn’t done by the well-known Survey of Consumer Finances that is the basis of most wealth studies. Nor is it done by journalistic efforts such as my regularly updated Wealth Scoreboard. And it isn’t done by the financial services industry, either. Their research tends to focus on our financial assets exclusively and regularly tells us that we need to save much, much more.
The reality is that when Social Security and pensions are considered, the gap between top and bottom is reduced substantially. Substantially, however, turns out to be not nearly enough.
One measure of the chasm is how much life-annuity income pre-retirees could buy with their savings. The researchers found that nearly half of all households could convert their entire savings into no more than $5,000 a year of lifetime income. Their savings, in other words, weren’t going to do much for their retirement security. The top 11 percent of households, on the other hand, could buy at least $50,000 a year of lifetime income.
Here are some of the important messages culled from the paper:
Social Security is really important for nearly everyone.
Whether viewed as a percent of income or as a form of ‘virtual wealth,’ Social Security varies from important to ‘life or death.’ Even small changes in benefit formulas will have enormous future consequences. While it is essentially the only resource available to those in the bottom 50 percent, it still appears to account for one-third of financial resources for those in the top 20 percent.
Home equity is a vital source of security for some retirees.
It appears, the researchers note, to be used like a deep reserve. To some extent, middle-income households seem to regard home equity as a reasonable substitute for long-term care insurance or a good sized emergency fund. While more than 90 percent of married households have some home equity, the bottom 30 percent of single households have none.
Being married is good for your finances.
Being single isn’t. While married households tend to have financial assets, housing equity, defined benefit pensions and strong Social Security income, single person households have less of each. So single person households have less flexibility as well as less money.
These differences are important because we are becoming a nation of singles. As recently as 1989 only 5.3 percent of women ages 40 to 44 had never been married. By 2009 the figure was up to 14.1 percent. It’s also a matter of actuarial reality that the percentage of population that is coupled peaks at ages 40 to 49. It declines after that because of death, not divorce. While 78 percent of households were married couples in 1950, only 48 percent were married in 2010.
This explains why our supermarkets are now filled with “single” servings of frozen vegetables. It also gives us a hint of the financial disadvantage our entire society will have as the boomer generation retires.
Marriage, friendship and sharing have never been so important— and so ignored.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.