Are Kentuckians Financially Prepared for Retirement?

The 2000 Census shows that half a million Kentuckians, or about 12.5% of the state’s population, is age 65 or older. By 2020, demographers at the University of Louisville project that older Kentuckians will number about 718,000 or 16.7% of the population. As the state’s population ages, so too will the number of people considering themselves “retired.” The extent to which these individuals are financially prepared for retirement has important budget implications for both state and local governments.

A survey of current and coming Kentucky retirees offers insight into financial preparedness.

“Planning for the Future,” a 2000 survey developed jointly by the Kentucky Long-Term Policy Research Center and the University of Kentucky (UK) Sanders-Brown Center on Aging, offers insight into, among other things, the financial preparedness of Kentuckians age 45 and older.(1) Conducted by the UK Survey Research Center, the survey asked respondents to indicate their level of confidence about the following statement: You (and your spouse/partner) have or will have enough money to support you in retirement, no matter how long you live. As shown in Table 1, Kentuckians are evenly divided on their confidence about retirement, but striking differences are found between income groups. While 20% of Kentuckians with incomes above $50,000 lack confidence about their financial preparedness for retirement, fully 86% of those with incomes below $15,000 are not confident about their retirement futures.

About half of Kentuckians are confident they’ll have enough money for retirement, but those with lower incomes are less confident.

Table 1:  Confidence About Financial Preparedness for Retirement Varies by Household Income

Kentuckians depend upon a variety of sources for retirement income.

The American Association of Retired Persons (AARP) defines a financially secure retirement as one built on four strong pillars: Social Security; pensions/savings; earnings; and health insurance.(2) Our survey data show that, in fact, Kentuckians are and will be depending upon a variety of income sources in retirement (see Figure 1). Clearly, however, Social Security and pensions are or will be major income sources.

Figure 1:  What source of retirement income will be most important?

Heavy reliance on Social Security can mean a lower standard of living.

As shown in Figure 1, an estimated 44% of current retirees and 31% over 45 years of age who are not yet retired say that Social Security is or will be their most important source of retirement income. That the average 2000 Social Security benefit was a modest $804 a month(3) may explain why those who say Social Security is the most important source of their retirement income have a higher likelihood of saying that their standard of living is “worse or much worse” in retirement (see Figure 2).(4) Overall, 27% of retirees in our sample say their standard of living is worse or much worse in retirement. However, the estimated probability that a respondent will say “worse or much worse” rises to 30% among those who say Social Security is their most important source of retirement income, compared with 17% for those who cite a source other than Social Security as most important.

Figure 2:  Compared to the end of your working career, is your current standard of living better, the same, or worse?

According to the 2001 Retirement Confidence Survey (RCS) from the Employee Benefit Research Institute (EBRI), the number of American workers who say they are saving for retirement is dropping after years of steady growth.(5) The 2001 RCS shows the percentage of individuals who said they had personally saved for retirement decreased from 75% in 2000 to 71% in 2001.(6) In Kentucky, our survey results for 2000 show that about 74% were saving for retirement. However, our findings indicate that, in general, Kentuckians have accumulated relatively modest savings (see Table 2). An estimated 18%, for example, have no retirement savings and 10% have less than $5,000. Any erosion in savings trends here could further undermine future income prospects, and potentially create higher rates of dependency.

Table 2:  About how much money in total have you saved for your retirement? Please include any personal savings you and your spouse or partner have and the estimated value of any retirement accounts you may have, including those maintained by your employer/employers. (Please DO NOT include Social Security.)

Many Kentuckians plan to work in retirement. Our survey results reveal that about two thirds (67%) of current workers in the sample plan to work at least part-time (see Figure 3), but only about one quarter (28%) of current retirees actually work. One possible explanation is that health problems keep people from working. We know, for example, that 60% of our sample respondents retired earlier than planned, mainly due to health problems.

Figure 3:  Have you worked or do you see yourself working for pay in retirement?

Concerning health insurance, the fourth pillar of a financially secure retirement, we found that a majority of older Kentuckians (54% of current retirees and 46% of coming retirees) rely or expect to rely mainly on Medicare which does not cover prescription drugs or long-term care.(7) Because older persons spend a large portion of their incomes on health care, these data bode further income gaps.

Many Kentuckians are not prepared financially for retirement.

These survey results show that many Kentuckians, like many Americans, are poorly prepared for a secure retirement. A commission formed in July 2001 by State Treasurer Jonathan Miller will explore ways of improving savings to help ensure more financially secure retirements. The Treasurer’s Commission on Personal Savings and Investment is being co-chaired by Sen. Brett Guthrie of Bowling Green and Rep. Susan Westrom of Lexington.

Footnotes

1. For information on the survey sample see the technical note at http://www.kltprc.net/policynotes/pn5techinfo.htm. Return to text.

2. American Association of Retired Persons, Beyond 50: A Report to the Nation on Economic Security, 23 May 2001. Return to text.

3. The American Savings Education Council (ASEC) and the Employee Benefit Research Institute (EBRI) Choose to Save Education Program, 1 Aug. 2001 http://www.choosetosave.org.  Return to text.

4.For information on the method and model, see the technical note at http://www.kltprc.net/policynotes/pn5techinfo.htm.  Return to text.

5. EBRI, 2001 Retirement Confidence Survey, News Release, “Fewer American Workers Are Saving for Retirement,” 10 May 2001 http://www.ebri.org/rcs/2001/index.htm. Return to text.

6. Ibid.  Return to text.

7. Michal Smith-Mello and Amy Watts, Kentucky Long-Term Policy Research Center, “Anticipating Future Needs for Long-Term Care,” Policy Notes 4 (June 2001). Return to text.