America takes a do-it-yourself approach to retirement by necessity. Over the past few decades, companies have gradually cut back on guaranteed retirement benefits and shifted the responsibility for saving for the future onto their workers.
As of 2011, only 18% of workers in the private sector had access to a traditional pension plan, down from 35% in 1990, according to the Bureau of Labor Statistics (BLS). (Pension plans are far more common for government employees.) Back in 1981, more than 80% of people who worked for big companies received a pension.
Unfortunately, it turns out that most people don’t do a good job of saving for retirement when left to their own devices. Fidelity Investments reported that the average balance in their 401(k) accounts was $91,300 at the end of 2014. (Fidelity is the country’s biggest provider of 401(k) plans.) That’s a record-high number, but it’s still not enough. Even among workers who’d been saving for 10 years or more, the average balance was $248,000 – less than most people will need to generate a substantial income in retirement.
Worse off than those who haven’t saved enough are those people who have basically saved nothing. Twenty-eight percent of workers had less than $1,000 in savings in 2014, according the Employee Benefit Research Institute’s 2015 Retirement Confidence Survey.
The problem is that many Americans simply don’t think long-term about their finances. Workers of all ages and income levels are more worried about day-to-day financial issues than more distant concerns, according to a recent study by the Center for Retirement Research (CCR) at Boston College. The researchers reached that conclusion after analyzing data from a 2012 survey of 25,509 American adults conducted by the FINRA Investor Education Foundation.
“Americans at all ages and income levels are shortsighted about their finances and on their own cannot be expected to devote much effort to addressing distant financial problems,” the report’s authors concluded.
Among all people surveyed, immediate financial problems, like difficulty meeting expenses or having a lot of debt, were associated with a significant decrease in financial satisfaction. Less immediate concerns, like not having insurance, worries about repaying student loans, and not saving for college, didn’t cause people a great deal of stress. That was true whether people were rich or poor, young or old.
Among the most striking findings was that not having a retirement plan [which researchers defined as not having a pension or IRA/401(k)] did not affect people’s feelings about their finances, even among those who were close to retirement age.
“The study found no relationship between this deficiency and the financial satisfaction of workers in any age group,” the authors wrote.
It’s hardly surprising that people who have immediate financial concerns, like not being able to pay their mortgage or cover a credit card bill, prioritize those issues above less pressing demands. But if people consistently ignore long-term financial planning, those distant worries will eventually become an immediate crisis.
The solution to American’s difficulty in planning for the future is simple, say the CCR researchers. Make saving automatic.
“With the shift in financial responsibility to households, it is important to make saving easy and automatic for households at all ages and income levels, so that they can set aside enough to secure a basic level of financial well-being in retirement,” the report concludes.
The evidence suggests that they may be on to something. An analysis by EBRI predicted that automatically enrolling people in a 401(k) would significantly increase their total savings compared to what they would save if enrollment was voluntary.
While about 62% of large 401(k) plans already feature auto-enrollment, many companies that don’t offer this perk have no plans to add it, according to a report in BenefitsPro. Plus, many companies that do offer automatic enrollment only extend it to new employees, leaving out people who were hired before the programs were put in place. That means a lot of people still aren’t getting the help they need to prepare for retirement.
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