We’ve been in a retirement crisis for a long time.
Way back in 1992, an Atlanta Journal-Constitution article warned that “[w]ith savings rates down, the future of Social Security in question and traditional plans going the way of the eight-track tape, experts say there’s a retirement crisis looming in America.”
A non-stop drumbeat of articles featuring similar warnings have continued down to the present day, although “retirement crisis” remains opaque as a description of the struggles faced by Americans. If there’s a huge problem, how many people are affected?
The answer, in survey after report after study, seems to be roughly half. Approximately 50% of Americans have consistently reported that they will struggle, or are currently struggling, with their retirement finances. With approximately 10,000 people turning 65 each day for the next two decades, that represents an avalanche of gray-haired unease.
The Retirement Struggle Is Real
The most recent data confirming the scope of the retirement crisis comes from the Employment Benefit Research Institute (EBRI). In a new study, the institute found “nearly half of employees are concerned with their household’s financial wellbeing, citing saving for retirement and having savings in case of an emergency as top sources of financial stress.”
Other recent studies offering a similar analysis include the Boston College Center for Retirement Research’s National Retirement Risk Index (NRRI), which pre-pandemic said that 50% of households are in danger of lacking sufficient funds to continue their standard of living once they stop working. After coronavirus-induced months of economic misery, that number has jumped to 55%.
This fear likely stems from a couple of things: Over-reliance on Social Security and a general lack of savings. As of June 2020, half of married retirees rely on Social Security checks for half of their income, according to the Social Security Administration, revealing a lack of cash elsewhere. That number jumps to 70% for unmarried people.
Just half of households, per the Federal Reserve, have any retirement accounts at all.
These are not recent trends—go back to 1998, and you’ll see a strikingly similar number of households with a retirement account in Fed data. This kind of stasis implies that while our retirement savings system can help some amass sufficient wealth to comfortably enjoy the last third of their lives, there’s something very wrong with the overall picture.
Why Are Americans’ Retirement Savings Falling Short?
To get a sense of how social scientists can measure how many Americans are struggling to save enough to maintain their standard of living in retirement, let’s dig deeper into Boston College’s NRRI.
The economists at Boston College use Federal Reserve data to calculate the odds that households helmed by people between the ages of 30 and 59 will be able to replace a sufficient percentage of their income once they retire.
The NRRI sees two reasons why household retirement income falls short of what’s needed to maintain standards of living in retirement: Lack of access to a 401(k) at work and insufficient savings.
The risk that people who have a 401(k) at work will struggle to maintain their standard of living in retirement is 48%, according to a 2019 report. While that’s not great, it’s certainly better than the 62% risk of not having enough money in retirement if your job doesn’t offer one.
Perhaps not surprisingly, only 12% of those lucky enough to have a pension at work are at risk. Pensions are designed to provide sufficient income in retirement to maintain a comparable standard of living. Defined contribution plans, like 401(k)s, depend on employees to first understand how much they need to save for a viable retirement, and then actually follow through on saving enough.
The big challenge for nearly all retirement savers is projecting how much to save and then following through on that plan, in good times and bad. The reality is that this is very challenging, even if you have a 401(k) at work and your own individual retirement account (IRA).
Stagnant wages and rising fixed costs, like health care and housing, have limited the ability of many to even stow away anything.
What Can You Do to Build a More Secure Retirement
The trade-off to sure up your retirement is as tough as a stewed skunk: You either need to save more now or work more later.
Boston College calculates that a 10% increase in contributions would cause the number of people at risk of missing their retirement savings goals to drop nearly 15 points to about 34%.
Thanks to the power of compounding, a sufficiently large increase in 401(k) savings can make the difference between a secure retirement and one that falls short of income needs.
“A five percentage point higher saving rate…reduces the NRRI by 11 percentage points for households ages 30-39, compared to only 3 percentage points for those 50-59,” writes the authors of the study.
Essentially, households need to sacrifice consumption now so they can put those dollars to work and increase their consumption once they stop working.
Your particular situation, of course, is unique, but try saving at least 10% to 15% of your pay–including any employer match–in your 401(k). Sign up for auto-escalation so that your contributions consistently rise each year, and avoid cashing out your retirement when you change jobs, which tends to happen when younger workers change jobs. Those without access to plans should save as close to that target as possible in an IRA.
Check out this T. Rowe Price retirement income calculator to see if you’re on track and how much more you might need to save.
Another option is to work longer. You don’t need as much savings when you reduce the number of years you’re out of the workforce. Plus, you’ll delay collecting Social Security. Just a third of households, rather than half, would be at risk if they worked until 67, rather than 65. If households also increased their savings, the percentage at risk drops to 23%.
Of course, life is more complicated than that.
A recent TransAmerica Center for Retirement Services survey found that 56% of retirees stopped working sooner than they envisioned, largely because of job issues (layoffs, unhappiness with the grind) and health (both their own and someone in their family).
Working longer, then, isn’t a strategy you can always count on. Instead, ramp up your retirement savings now lest you get on the wrong side of the divide and run out of choices later in life.
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