Many Americans either simply have no retirement savings at all, or lack the time or expertise to know if their employer’s plan is a good one
Are we all in denial or is it simply impossible to save enough for retirement? Is it some kind of toxic combination of the two? Whatever the reason, yet another study – this one from no less an authority than the non-partisan US government accountability office (GAO) – is here to remind us that we’re woefully unprepared, financially speaking, for retirement. While we may all have dreams about how we’d like to spend our retirement years – fishing, golfing, writing that great American novel – the truth is that as many as half of all households with Americans 55 and older have no retirement savings at all . Nothing. Zip. Nada. Not a dime.
And the news gets worse, the GAO reports. Because households headed by older Americans that don’t have retirement savings like 401(k) plans or IRA accounts also are less likely to have other sources of income that they can rely on when they retire, such as pensions or even plain old savings accounts. About 29% have absolutely nothing : no pension plan, no savings, no 401(k), nothing.
The figures are worse the lower down the socio-economic ladder you go, says Diane Oakley, executive director of the National Institute on Retirement Security. “The results are tilted in favor of the wealthiest Americans, so the bottom half of the baby boomers, by wealth level, had only 4% of the retirement assets,” she says. “The wealthiest 10% had 56% of the retirement assets.” The same is true when you look at minority groups, she adds: only 20% of Latinos have retirement accounts containing more than $10,000; 75% of African-Americans are in the bottom quartile when it comes to retirement assets.
If you think you’ve heard this news before, you’re probably correct. Survey after survey has shown how Americans fail miserably at retirement planning. The average 401(k) plan balance hit an all-time record of $91,800 in the first quarter of this year and some long-time savers had balances of as much as $251,600, according to calculations by Fidelity, which manages the single largest chunk of the country’s retirement plan assets.
That sounds impressive, right? Until you realize that many financial advisors recommend that you have as much as 12 times your income in your final years of employment socked away in your retirement nest egg at the time you retire, if you want to maintain your lifestyle. By that calculation, someone with the average 401(k) balance would have been earning an annual income of only $7,500 in their final year; someone with that super-saver balance would have had a final income of only $21,000. By extension, those are the kinds of post-retirement incomes those nest eggs can support. The math just doesn’t work.
Then there’s the fact that many Americans simply don’t have retirement accounts at all, whether because their employer doesn’t offer them (many small businesses don’t) or because they are self-employed or contract workers. When they do have a 401(k) available, employees may lack the time or expertise to figure out whether it’s a good plan or lobby for changes that would make it better – or even the kinds of wage increases to make saving possible. “We’ve turned over responsibility for retirement security to employees, but haven’t given them the ability to accomplish that objective,” Oakley says.
Some tips: One big warning sign is a plan that is heavily weighted to high-cost mutual funds – or worse still, the company’s own stock . It’s rarely a good idea to borrow against your 401(k) balance unless you’re desperate; it’s always a good strategy to take advantage of an employer’s offer to match your contributions – even though Americans leave an estimated $24bn a year on the table at present.
But if you think it looks grim right now, just wait.
“We are going to see worse numbers in the future,” says Bailey Childers, executive director of the National Public Pension Coalition in Washington DCThe problem, she argues, is that even for those who have them, “401(k) plans have not worked.”
These defined contribution plans definitely are better for the bottom lines of private sector employers. Companies don’t have to worry about managing big pension obligations, and have been able to make their employees responsible for saving for their own retirement, offering them the vehicles in which to do so.
“But pension fund assets are pooled together and tend to generate much higher returns than 401(k) funds, with lower fees,” says Childers. That big question of costs and benefits is the reason that the state of West Virginia ended up returning to a classic pension (aka “defined benefit”) model for its public sector employees, after a long and rather disastrous experiment trying out the 401(k) (aka “defined contribution”) approach from 1991 until the financial crisis of 2008.
Only about 20% of private sector employers still pay out pensions – a fixed sum every month or year – to their retired workers, and most of those plans are restricted to older workers hired before a certain date; if you join one of those companies today, you’ll be offered the chance to participate in a 401(k) plan. Even then, many of them are eliminating their defined benefit plans, with Bank of New York Mellon announcing it would do so effective at the end of this month. In exchange, bank employees hired before 2010 who would otherwise still participate in this plan will get an extra 2% of their pay that they can direct to their 401(k) plan.
But these employers are being short-sighted, argues Oakley. It may be logical that they don’t want to pay out more than they need to in order to pay for employees’ retirement costs. On the other hand, she wonders, what happens if baby boomers find themselves unable to spend when they reach retirement? “We know that spending by beneficiaries of pensions today generates $1tn of income for the economy and supports six million jobs, in both recessions and recoveries,” she adds.
Employers are blind to other aspects of the looming retirement crisis, Oakley notes. Someone who realizes that they are financially unprepared for retirement isn’t going to retire, and will cling to their job as long as possible. That will block the upward movement of younger workers, and present management with big challenges : how to keep the latter from bolting by offering them promotions and raises, and how to graciously ease out older workers without triggering age discrimination lawsuits. “It’s perilous territory,” Oakley says.
Under-prepared baby boomers on the verge of retirement, too, are blind to certain uncomfortable truths. A report on the economic wellbeing of US households by the Board of Governors of the Federal Reserve System, published last month, revealed that 26% of those surveyed declared their retirement “plan” was to simply keep working; 12% didn’t plan to ever stop working; another 45% who did plan to retire intended to work to some extent to fill the financial gaps between their savings and their financial needs. In other words, only 17% didn’t plan to work after retiring. Unsurprisingly, the lower their savings totals, the more likely they were to say that they intended to keep working – clearly assuming that they’ll stay in good health into their 90s, and that the jobs will remain available.
“The bottom line, however, is that we can’t all be Walmart greeters,” says Oakley.
There are no good, or easy, answers to this flood of data. To start with, however, we can at least avoid the blame game – telling Americans that it’s all our own fault. It’s true that we’re not great at embracing short-term pain for long-term gain – but the current retirement savings system is so patchy and complicated that navigating it, and ensuring your plan (if you’re lucky enough to have one) is good and offers a reasonable mix of investment options requires a level of sophistication and a time commitment that many of us simply don’t have.
Then, too, it’s simply too easy to make a misstep. For instance, if you’re 30 and haven’t already started saving, you’re already behind. “With compound interest , the money you set aside the first ten years that you save ends up being worth more than what you save during the next 35 years,” assuming you save the same amount each year, says Oakley. “Trying to catch up toward the end of your career just doesn’t work for you.”
We can start by lobbying for some kind of reform to Social Security that will address the reality that for millions of Americans, retirement savings simply won’t be adequate for them to live on by the time they reach their 70s and 80s. By the time that’s done, we’ll need to have begun thinking about ways to tweak the retirement savings system itself. Many proposals have been tossed into the mix, from President Obama’s new myRA accounts to the proposals by former US Senator Tom Harkin for some kind of Australian-style forced savings mechanism , however Orwellian that sounds to Americans.
As the Chinese curse says: “May you live in interesting times.”
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