Tiny nest egg? You can still retire

By Scott Burns

A new study indicates most Americans will die broke. You may think that's just more bad news, but read on. I'll tell you why things may be better.

Ernst & Young, a major accounting firm, recently completed research on financial security in retirement. The study examines the retirement savings and other resources of Americans with $50,000 to $100,000 in annual pre-retirement income. It considers investment returns, volatility and health care expenses, and it takes into account the eventual death of a spouse. The study concludes that households with a defined-benefit pension, as well as Social Security and retirement savings, are far less likely to outlive their savings than households that don't have a defined-benefit pension.

A married couple with annual pre-retirement earnings of $75,000 who will have a pension have a 31% chance of outliving their assets. A couple earning the same amount but without a pension have a 90% chance of outliving their assets.

Talk about grim.

The study confirms what economist Alicia Munnell, the director of the Center for Retirement Research at Boston College, has been warning about for years: that a smaller role for Social Security benefits, rising Medicare premiums and disappearing pensions will make the retirement of younger workers far more difficult than the lives of current and past retirees. Worse, in her book "Coming Up Short," she shows that 401(k) plans are a poor replacement for worker pensions.

So where is the hopeful news? It's between the lines and in the assumptions of the study.

Create your own pension

Fewer workers can expect to receive retirement pensions from their employers, but it is possible to create your own pension. Just convert some of your retirement savings into a lifetime annuity.

A single woman without a pension, for instance, has about a 75% chance of outliving her assets. With a pension, the odds go down to about 25%. The change in the odds is similar for single men. Though the difference is not so dramatic for married couples -- 90% down to about 54% -- it's clear that having a guaranteed lifetime income in addition to Social Security adds major security to retirement.

This finding was first noted by researchers John Ameriks, Robert Veres and Mark J. Warshawsky in late 2001. Bottom line: If you have a 401(k) but no pension, part of your retirement planning should include converting some of your savings into a lifetime annuity.

You need less than you're told

The Ernst & Young study, which was done for Americans for Secure Retirement, is like most retirement research done for the financial-services industry. It assumes that we need to replace a large portion of the income we are earning immediately before retirement.

As I have demonstrated in a number of columns -- and as Boston University economist Laurence J. Kotlikoff and I show in "Spend 'Til the End" -- most of us have never had 70% to 85% of our pre-retirement income to spend on ourselves.

Continued: Fewer commitments during retirement

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