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Encouraging Trends for Retiree Finances

Adam Zoll
Christine Benz

Adam Zoll: For Morningstar, I’m Adam Zoll and welcome to The Retirement Radar. Some new numbers suggest some improving trends for retirees, and here to talk about these and other trends is Christine Benz, Morningstar's director of personal finance.

Christine, thanks for being here.

Christine Benz: Adam, it’s great to be here.

Zoll: Fidelity released its annual estimate of retiree health-care costs recently, and it had some actually encouraging numbers in it.

Benz: It did. So it estimated that a couple retiring at age 65 would have approximately $220,000 in health-care costs over their lifetimes. That was actually an 8% drop from the estimate in 2012. So that's good news because we typically think of health-care costs as maybe running a little higher than inflation. Here was actually a lower number, and it was the only the second time since Fidelity began tracking this data that the costs have declined for this hypothetical couple.

So it's important to remember the assumptions that Fidelity is using when putting together these estimates. Importantly, the estimates don't cover some of the costs that typically are incurred by retiree households, so long-term care costs are not baked in here. Dental costs, which we've heard from some of our users can be high and unexpected cost in retirement, they're not here. Then out-of-pocket prescription-drug costs are not here either. But otherwise it's a pretty encouraging data point, I think, given that health-care costs are such a big part of retiree spending, and part of it owes to the fact that Medicare expenditures have actually declined. So that in turn flows through to Medicare participants who have lower coinsurance costs and other out-of-pocket costs.

Zoll: Some other encouraging numbers that came out from Fidelity recently involve retirement account balances. Can you talk to us about that?

Benz: Yes. So Fidelity has its hands on participant balances because the firm runs a lot of 401(k) money. Every year they put out estimates of what the typical participant balance looks like. What they found is the median balance is $80,000. That’s a high point since the market bottomed in March 2009. So that’s encouraging news. It’s particularly encouraging for people who are getting ready to retire, so people around 55, in that general age band. What they found is that the typical balance had actually doubled since early 2009 from about $130,000 to about $255,000. So very, very good news for people getting close to retirement. They’ve seen a really nice recovery in terms of the assets in their 401(k) plans.

What was a little discouraging is when you look at the small subsection of investors who pulled out in early 2009, moved to cash or moved out of stocks entirely, what you saw was that this group had a much less exciting increase in their balances. They, in fact, just saw a 26% increase in their balances since early 2009. So it's disappointing for this group. I think it's a good reminder about the importance of kind of setting an asset-allocation mix for your retirement plan and then not fiddling with it too much, and certainly not selling yourself out at the market bottom.

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Zoll: Another report found a bit of a generational divide in terms of retirement savings. Can you address that?

Benz: Yes. This is a Pew Charitable Trusts study, and it looked at retirement savings and overall household assets by generational band, and what it found was that people in the baby boom generation--particularly the late baby boomers, people born in the 1960s--and the generation X investors, have much less saved for retirement than their older counterparts. So you typically look at income-replacement rates as kind of a metric to see whether someone's ready for retirement. What this study found was that people in the generation X band and the later baby boomers were on track to have about 50%-55% of their pre-retirement income in retirement. So there is some catch-up to do. Obviously, the recession hit this group hard and so did the housing crisis. So, in contrast with their older counterparts who already had a lot of equity in their homes, this group of savers didn't have as much in terms of home equity. So they were hit disproportionately hard by the housing market sell-off.

Zoll: Another retirement trend that’s been in the news lately is this idea of a phased retirement. Can you explain what a phased retirement is?

Benz: Yeah, it's interesting. It’s kind of a buzzword in terms of retirement planning. What it means is that you take some sort of creative spin to what your retirement might look like. So it generally means that you stick with your same employer but maybe you segue into retirement by working on a part-time basis, leading up to retirement, or in fact, maybe you retire but continue to work part-time into retirement. This has a couple of great beneficial effects from a financial standpoint. It might also have some health and wellness side effects. But specifically in terms of the financial health of a household, it has a positive side effect, in that it may delay receipt of Social Security, and certainly the data point to the longer you can wait to receive Social Security benefits, the better off you'll be in terms of the size of the payments over your lifetime. It would also reduce the strain that you would put on your retirement assets early on in retirement, which is also a positive. I think also when people are thinking about what their retirement might look like, they're oftentimes thinking about doing a lot of travel and spending early on in retirement. So it seems that if you're continuing to work part-time in retirement, having at least some income coming in the door could help facilitate some of those costly trips.

Zoll: It also helps to give people an opportunity to sort of try retirement on for size to see what they may or may not want to do with regard to retirement lifestyle.

Benz: I think that's exactly right. So it’s kind of squishy about the percentage of retirees and the percentage of workplaces that are using some sort of phased retirement. But there was an AARP study looking at this trend back in 2010 that found about 20% of workplaces were actually implementing some sort of phased retirement for their workers, and I think it’s an encouraging trend.

Zoll: Great. Well, Christine, thanks very much for being with us today and sharing your thoughts.

Benz: Thank you, Adam.

Zoll: For Morningstar, I’m Adam Zoll. Thanks for watching.