What if we’re not improvident fools?
    That possibility is suggested by a recent study.  It received virtually no attention, perhaps because it contained no bad news.
The study provides some confirmation of what I’ve been hinting at for several years--- collectively, we’re not financial jerks. People will find that their retirements are more pleasant and more solvent than the retirement/investment industry wants us to believe.
    The study, done by economists at the University of Wisconsin and the Urban Institute, asks a rhetorical question:“Are Americans Saving ‘Optimally’ for Retirement?”  It answers the question by building a complex model of lifetime earning, consumption and saving patterns based on a sample of more than 12,000 people who were age 51 to 61 in 1992. The model indicates how many Americans in that group will have enough resources to carry them through life, including nursing home stays.
    The answer?
A whopping 84.4 percent. Of the 15.6 percent who fall short, the typical shortfall is not severe.
    I call that good news. We’ll have to cut the print run for the first edition of “The Retiree Cat Food Cookbook.”
The study shows you’re in danger if you are in the bottom 30 percent of income, don’t have a high school degree, and are single. For all others, the odds are pretty good you will get through life with a surplus, which is what many people intend. Only about 5 percent of the top 30 percent of earners are expected to have a problem. Only 12.7 percent of college graduates are expected to have a problem.
    This achievement is not magical.
Much of it comes from the economists’ idea of “optimal” saving--- that we need to accumulate only enough assets to pay for our expenses while living and should aim to die broke rather than leave anything for kids or charity.
    A little more comes from assumptions about using the equity in our homes as we age. The study assumes that we are willing to liquidate our home equity to sustain our standard of living as we age. We can do this by downsizing, going from owning to renting, or by using a reverse mortgage. When the researchers excluded only half of home equity, the percentage of households that had enough assets fell from 85.6 percent to 61.2 percent.
    The size of the drop tells us a lot about the importance of homeownership for most Americans.
    The economists also assumed that households achieved a 4 percent real return on their savings. Some households may earn a good deal less by investing too conservatively or by being stuck with bum employer stock in their 401(k) plan. That said, the average asset allocation in 401(k) plans, according to the Hewitt 401(k) index, is running nearly 70 percent equities--- so the overall return assumption is reasonable.
    Finally, Social Security looms large for all retirees. The study assumes that Social Security will deliver the retirement income it has promised, at least to those in this age group. If Social Security benefits were cut by 25 percent, the economists found, 37.2 percent of all households would not have saved enough to compensate.
    So we’re pretty vulnerable to Social Security and home values.
    One way to understand the importance of Social Security is to compare the implicit value of Social Security in each income group to the median net worth of each income group. The virtual wealth of Social Security income exceeds the net worth (savings, home equity, etc.) until you are in the top half of all income earners. Even if you are in the top 10 percent of all earners, the virtual wealth of Social Security ($202,659) is equal to about half of median net worth ($393,000).

Social Security: Vital for Many, Important to All
This table compares the median net worth, as measured by conventional accounting for financial assets, home equity, etc, with the imputed value of Social Security retirement benefits for income groups from the highest 10 percent of households to the lowest 10 percent of households.
Earnings Decile Median Net Worth Median Social Security Wealth
Lowest 5,000 $26,202
2nd 25,500 $42,159
3rd 43,485 $57,844
4th 75,000 $77,452
Middle 90,000 $94,929
6th $124,348 $119,011
7th $128,580 $133,451
8th $167,000 $151,397
9th $226,000 $163,639
Highest $393,000 $202,659
Source: Scholz, Seshadri, Khitatrakun, “Are Americans Saving ‘Optimally’ for Retirement?”

Does this mean we can stop saving?
    No way.  It just means we can take our “Fear Factor” down a few notches.

On the web:

The Hewitt 401(k) Index:

Earlier columns about why we’re better off than we’re told we are:

Sunday, April 29, 2007: The Realities of Retirement Income

Sunday, May 21, 2006: Families May Need Less Than They Think to Retire