With multiple generations facing a new economic reality, the retirement crisis in America is taking center stage. Considering that defined benefit plans are moving closer to full extinction, many people are not saving enough for their own retirements. This crisis will likely play out for several decades. However, there is hope for those willing to make sacrifices and assume responsibility.
Retirement once included a combination of pension plans, social security, and personal savings, but that traditional three-legged stool of retirement is deteriorating. Outside of the public sector, Baby Boomers will be known as the last generation to enjoy pension plans. Hardly anyone in Generation X — those born from the 1960s to early 1980s — will have guaranteed benefits from their employers, while millennials won’t even know what pension plans are without looking them up on their smartphones.
That leaves social security and personal savings for retirement funding, which carry their own problems. “When you look at social security, if there is nothing done to change the savings of social security, it has been forecast that in 20 years there will be a 23 percent reduction across the board for every beneficiary,” said Chad Parks, chief executive officer of The Online 401k, in a phone interview. “It’s hard to look down the road in 50 years for the millennials, but a lot of the ones we talk to have zero expectations for social security.”
Recent reports have highlighted the severity of the retirement crisis. In fact, more than half of Americans are at risk of not being able to afford essential expenses in their so-called golden years. According to Fidelity’s Retirement Preparedness Measure, 55 percent of Americans are behind in retirement preparedness. The median score indicates working Americans are on track to meet just 74 percent of their estimated retirement expense goals and face a 26 percent income gap.
Looking at retirement preparedness by generation, baby boomers are on track to reach 81 percent of their retirement goals, which is the highest rating among all generations in the analysis. Generation X respondents are on track to reach 71 percent of their goals, while millennials are the furthest behind at only 62 percent — especially concerning, since many anticipate an early retirement.
Who’s to blame for the retirement crisis? Several factors are impacting wallets across the country: skyrocketing health care costs, stagnant wage growth, rising living expenses, higher debt loads, and an overall weak labor market. The Great Recession magnified all of these factors. Making matters worse, the government has made saving for retirement a complexed process.
“Government is also to blame. They’ve made saving for retirement a very complicated and loop-holed process,” said Parks. “The fact that employers have to be participating in the process means small and big businesses have to be willing to offer a retirement plan to their workers. Not all companies what that responsibility or liability. Ninety-two percent of businesses between two and 20 employees offer no workplace savings, because it’s too complicated or they perceive it to be, or they don’t want the exposure to it. That percentage represents almost 4 million businesses or 40 million employees that don’t have the ability to save at work.”
An alarming amount of Americans say they plan on delaying retirement or working until death to compensate for a retirement shortfall. According to a new survey from Gallup, 24 percent of baby boomers don’t expect to retire until they reach the age of 65, compared to the average age of 61 that American retirees say they retired at. Furthermore, 39 percent of baby Boomers don’t expect to retire until they are 66 or older, and 10 percent say they will never be able to retire.
Another survey from Wells Fargo found that 37 percent of Americans with incomes between $25,000 and $100,000 say they will never retire and will work until they are “too sick or die.” Meanwhile, 34 percent say they won’t retire until they are at least 80 years old, up from 25 percent in 2011 and 30 percent in 2012.
“Many people figure they will just keep working longer. That’s fine on paper, but that presumes there’s a job for them to work at. I think that raises this idea of a demographic bubble moving through. It makes you wonder, how are we going to employee the boomers later if that’s what they choose to do? It’s a risk proposition to assume you’ll just work longer,” said Parks.
Ultimately, the responsibility of retirement falls on individuals. Nobody cares about your money and future as much as you do. As a former certified financial planner, Parks recommends creating a plan that gives you an idea of where you want to go and how you are going to get there. He notes: “That means using tools, calculators, your own knowledge, or seeking professional help if needed. It’s about sitting down, making a budget, and facing reality. If you don’t know what you’re earning and spending on a weekly or monthly basis, there’s no way you can know where you’re going in 20 or 30 years.”
Saving on a regular basis is also key to building a bigger nest egg. Regular savers polled in a study by HSBC accumulated an average of $168,099 in retirement savings and investments compared to only $86,529 by those who only save from time to time. The earlier you can start saving on a regular basis, the better your chances will be on reaching your financial goals.
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