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Column: Are Americans overconfident about paying for retirement?

Editor’s note: A version of this story originally appeared on Next Avenue, a PBS platform featuring stories for people over 50. You can read the original story here.

A new landmark study of America’s workers and retirees shows they’re significantly more confident than a year ago in their ability to live comfortably throughout retirement. I wish I could believe them.

But based on actual retirement savings trends, retirement health costs and long-term care expenses, I sadly think many of the workers and retirees are kidding themselves. I hope I’m wrong.

Eighty-two percent of retirees are confident they (and their spouse) will have enough money to live comfortably throughout retirement, according to the 2019 Retirement Confidence Survey of 2,700 Americans 25 and older from the Employee Benefit Research Institute (EBRI). That’s a sharp rise from 75 percent a year ago and comparable to the highs in 2005 and 2017.

Sixty-seven of workers–as opposed to retirees–are confident in their retirement plans, up from 64 percent a year ago and 60 percent in 2017.

And here’s why I’m dubious:

The EBRI survey also found that 40 percent of workers said they have less than $25,000 in savings and investments, not counting their home and any traditional pension plans. Another 9 percent had $25,000 to $49,999 and another 9 percent had $50,000 to $99,000. That brings us to 58 percent having under $100,000 saved. (A recent Transamerica survey found that boomers have saved a median of $152,000 and Gen Xers have saved $66,000.)

Similarly, a March 2019 U.S. Government Accountability Office report to Congress found that 48 percent of U.S. households aged 55 and over have no retirement savings.

And I think retirees and workers are wildly optimistic about their ability to pay for health and long-term care costs in retirement.

In the survey, 80 percent of retirees said they’re confident they will have enough money to take care of their medical expenses during retirement; 59 percent felt the same way about long-term care, such as nursing home or home care. And those percentages are way up from a year ago (70 percent and 51 percent). A striking 59 percent of workers said they’re confident in having enough money for medical expenses in retirement and 52 percent felt that way about long-term care costs.

This despite the recent Fidelity Investments estimate that a healthy couple retiring at 65 this year can expect to spend $285,000 in health care costs in retirement, not including long-term care. And the new Senior Living Cost Index from A Place for Mom, a national senior-living referral service, said it now costs about $47,000 a year to live in an assisted-living facility and about $60,000 annually for a memory-care unit. Those figures will almost certainly increase in coming years.

Craig Copeland, EBRI’s senior research associate, said was surprised how confident workers and retirees have become about their retirement finances.

“I was certainly expecting [the retirement confidence] numbers to go up from a year ago, with what’s going on in the economy and the job market. People have been seeing raises and inflation is under control. There are a lot of good things going on,” Copeland said. “But the magnitude is a little larger than I expected.”

Copeland seemed skeptical about whether the strong confidence numbers were warranted. “If you look at what people have saved, they’re not at the numbers people say in the survey that they should be saving at,” he said.

Taking the temperature of health costs

Copeland was also surprised, as I was, about the respondents’ confidence in their ability to pay for health and long-term care costs in retirement. He attributed it to the current low rate of medical inflation.

“They think that will continue,” Copeland said. “That may be a false hope, because if people get hit with long-term care expenses, they typically aren’t going to have enough money for them.”

I asked Copeland why workers and retirees have grown more confident about their retirement prospects when the stock market fell about 6 percent last year. “Middle America people are more likely to have money in bank accounts than in the stock market,” he said. And interest rates rose throughout much of 2018, providing heftier returns.

Considering all of this, it’s important to point out that just 23 percent of workers say they are “very confident” about having enough money to live comfortably through retirement. That’s also up substantially from last year, though, when 17 percent said so.

Working in retirement

There also seems to be a large disconnect between perception and reality when it comes to working part-time in retirement.

Once again this year, a preponderance of workers (80 percent) said they think they‘ll work for pay after they retire. Yet only 28 percent of retirees have actually done so, and that percentage fell from 34 percent in 2018.

“We’ve seen this gap for a number of years,” said Copeland. “We also see people ending up retiring earlier than they had planned due to illness or disability or a loss of their job. It can be very difficult to get back to work.”

Copeland expects the percentage of retirees working part-time to increase, but doesn’t expect much of a narrowing in the chasm between the percentage planning to work and those actually working.

The key to confidence

As in previous years, the EBRI survey found that having a workplace retirement plan was a key factor in whether Americans are saving for retirement. Some 79 percent with a plan have saved for retirement while only 17 percent without a plan have done so. “And this comes through in the confidence numbers,” said Copeland. While 74 percent of workers with retirement plans are confident about living comfortably in retirement, just 39 percent without a plan are.

Legislation moving through Congress might help the ones lacking access to plans — often small business employees and the 27 million Americans who are part-time workers. The SECURE bill would make it easier for both to contribute to workplace retirement plans.

But, Copeland said, “I expect it would be four or five years down the road before that law would let people have enough to accumulate for retirement to see if this shows up in the retirement confidence numbers.”