Sunday, May 01, 2016

America is in the Midst of a Retirement Savings Crisis

One topic I’ve covered repeatedly over the past decade is the lack of retirement readiness for most Americans. This is really a societal issue. What will become of all the seniors who have no means to cover even basic needs in retirement?

How many years will millions of seniors be able to work beyond the customary retirement age, and what types of jobs are suitable for people in their 70s?

The retirement savings of the typical American is neither healthy or adequate. In fact, the issue has reached crisis levels.

According to the Employee Benefit Research Institute, nearly half of Baby Boomers born between 1948 and 1954 are at risk of not having enough money to pay for basic expenditures in retirement.

When it was conceived, Social Security was intended to be just one leg of a three-legged retirement-support system, also consisting of savings and a pension.

Yet, among elderly Social Security beneficiaries, 53 percent of married couples and 74 percent of unmarried persons receive 50 percent or more of their income from Social Security.

Moreover, 21 percent of married couples and 46 percent of single people receive 90 percent or more of their income from Social Security.

This provides a picture of just how reliant most Americans are on Social Security.

However, the average monthly benefit for the 40.5 million Social Security retirement beneficiaries is just $1,345 at present.

That amounts to just $16,140 annually, which obviously doesn’t go far. Add in near-zero interest rates, and you can see the problem for so many retirees.

For decades, seniors were able to live off interest payments from certificates of deposit (CDs), plus money market and savings accounts. That is no longer the case.

Pension plans have become quite rare in the U.S. Most companies have stopped offering defined-benefit programs altogether.

Today, just 18 percent of private-sector workers are covered by a defined-benefit pension, down from 35 percent in the early 1990s.

The shift from defined benefit pension plans to 401(k)s is largely to blame for the retirement crisis.

The Center for Retirement Research at Boston College (CRR) estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until age 65.

Just how big is the problem?

Alicia Munnell, director of the CRR, testified before the US Senate that the nation’s Retirement Income Deficit (RID) is now a whopping $7.7 trillion, and that it had risen $1.1 trillion in just the previous five years.

The Retirement Income Deficit is the gap between what American households have actually saved today and what they should have saved today to maintain their living standards in retirement.

Trillions are really big numbers, and its hard for most people to get the heads around the scope and magnitude of the retirement crisis. But the following number helps to crystallize the issue:

Today in America, over half of households 55 and older have nothing saved for retirement, according to the Government Accountability Office (GAO).

Think about that for a moment. It’s stunning.

More than half of American households are roughly a decade from a normal retirement age, yet it is inconceivable that they will experience anything remotely resembling a normal retirement.

All of this sounds the alarm that tens of millions of Americans will be unable to adequately fund their upcoming retirement years.

We are already seeing many seniors moving in with their adult children because they can’t make ends meet. This is a necessity, rather than a choice.

Another growing trend is seniors living like 20-somethings, with roommates.

PBS described the movement this way:

"According to an AARP analysis of census data, approximately 490,000 people — 132,000 households — live in a Golden Girls situation. And the number is expected to grow, especially given that one in three Baby Boomers is single and a disproportionate number of them are women.”

While it may be too late for the huge number of people age 55 and older who have no retirement savings, younger workers can plan ahead and start preparing for their senior years now.

Many financial planners recommend that you save 10 percent to 15 percent of your income for retirement, starting in your 20s.

But even if you're in your 30s or 40s, it's not too late to start planning for retirement.

As a general rule, you'll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses.

The key is to have a plan, and to start executing it now.

If you fail to plan for retirement, you might be planning to fail in retirement.