SOURCE: Barclays Global Investors

April 30, 2008 09:00 ET

Many Americans Face Future Shocks in Retirement

New Research Finds Mid-to-Upper Wealth Households Highly Sensitive to Changes in Current Retirement Benefits

SAN FRANCISCO, CA--(Marketwire - April 30, 2008) - Barclays Global Investors, N.A. (BGI), one of the world's largest asset managers, today released a new research paper showing that many Americans on the doorstep of retirement, especially those with mid-to-upper levels of wealth, could be in for a shock during their retirement years.

With saving rates near historic lows, many American workers are relying heavily on the equity in their homes, future wages, and Social Security benefits to fund their retirement. "When you factor in 'shocks' to future government benefit programs as well as home equity, large portions of the U.S. population are tenuously prepared for retirement," said Matthew H. Scanlan, CFA, Head of BGI's Americas Institutional Business.

The paper, "The Future Shock of Retirement," which Scanlan co-authored with Jonathan Cohen, BGI's Senior Fixed Income Strategist and Matthew O'Hara, PhD, Head of BGI's Securitized Credit Research, found that a "surprisingly benign" outlook for American retirement stability depicted in some recent academic literature is based on an assumption that current costs and benefits will remain stable in the future. "This assumption is unrealistic based on our survey of the state of American retirement as represented by government programs, corporate pensions, and personal savings," the paper's authors wrote.

Traditionally, individuals have assumed that the value of their houses will appreciate, that government benefits are irrevocable, and that they will enjoy their current or even better wages until retirement. "These components of wealth, which form the lynchpin for retirement security for most Americans, are highly dependent on factors beyond the control of retirees," Scanlan said. "Our paper demonstrates that the retirement preparedness for a broad range of Americans would change dramatically if government benefits are reduced, or means-tested, and housing prices become more volatile."

The paper assessed the sensitivity of retirement wealth to potential future "shocks" such as increased out-of-pocket medical costs and the amount of home equity that will be consumed through use and will not be available to generate retirement income. In the paper, researchers subtracted $7,000 per year for middle-to-upper income households under the assumption that means-testing for Medicare would eliminate the benefit for this group, requiring those affected to buy healthcare privately. The paper also determined that only 40-to-50 percent would be available for non-housing needs in retirement.

The results of these shocks to government benefits and adjustments to home equity show that middle-to-wealthier income groups are particularly vulnerable and stand to lose from 20 to 28 percent of their total wealth in retirement.

"They may appear reasonably well prepared for retirement under current conditions, but are in fact highly sensitive to future changes," Scanlan said. "To avoid a retirement crisis, substantial changes in the behavior of government, the private sector, and individuals will all be required."

While policymakers explore various options to stabilize the Social Security and Medicare systems, there are several measures noted in the paper the asset management community should consider or take action now to help alleviate the shocks to the most vulnerable preretirement groups:

-- Design defined contribution plans that incorporate the best features of defined benefit plans. "The Pension Protection Act of 2006 and related Department of Labor regulations provide fiduciary protection to DC plan sponsors adopting the kinds of practices we recommend -- automatic enrollment, high default contribution rates, and default investment options that are properly diversified across asset classes," Scanlan said.

-- Continue the evolution of lifecycle funds. "With DC plan balances still making up a relatively small proportion of total retiree wealth, the current crop of target-date funds is probably sufficient," Scanlan noted. "However, as their importance in security retirement stability grows, these products will have to evolve toward customization and more sophisticated investment engineering."

-- Develop strategies that more effectively invest the sponsor's matching contributions. "The plan sponsor has the responsibility for taking the initiative in providing employees with the opportunity to accumulate adequate retirement wealth," Scanlan said. "One overlooked opportunity in this area is the sponsor's matching contribution."

-- Develop targeted investment strategies that address the unique characteristics of individual retirees. "Some of the wealthiest households have low income, while some of the highest-income households have relatively low wealth," Scanlan said. "We need to develop strategies that specifically target the tails of the wealth and income distributions. For example, those high-income, low-wealth households might benefit from a strategy focused on additional risk with the goal of "catching up" to a level of wealth commensurate to income."

-- Individuals will have to take a more active role in managing their own retirement security. "Most individuals know little about managing longevity and inflation risk; people tend to think of their wealth in terms of the lump-sum amount rather than the real annuitized cash flow it can generate," Scanlan said. "Plan sponsors and financial service providers must place special emphasis on expressing retirement account balances in terms of annuitized income. This sounds like a simple adjustment, but as most plan sponsors know, attempts to change behavior face a considerable challenge."

The complete study is available on the BGI website at:

Note: The data for BGI's research comes from the 2004 update of the University of Michigan's Health and Retirement Study (HRS). To examine the financial health of a segment of the baby boomer generation, BGI restricted its analysis to households in which the oldest household member was between 51 and 61 years old at the time of the survey. There are 3,424 households surveyed in that data set.

About BGI

Barclays Global Investors is one of the world's largest asset managers and a leading global provider of investment management products and services. It has over 2,900 institutional clients and over $2.0 trillion of assets under management. It transformed the investment industry by creating the first index strategy in 1971 and the first quantitative active strategy in 1979. BGI is the global product leader in exchange traded funds (iShares) with over 320 funds for institutions and individuals globally.