Although this article by Megan McArdle of The Daily Beast is a little doom and gloom, “The Not-So-Golden Years” has some good information to help us make better decisions for our retirement. She says that “American retirement is in free fall, and even the safest plans are turning out to be dangerous.” Some of the statistics are grim, but I want Americans to know that there is some hope and that there are ways to help finance your retirement. The reality of the mid-19th century was that many people were able to work for 30 or 40 years and have a comfortably financed retirement that lasted the same amount of time. That really is not the case for most Americans anymore. Average savings actually don’t look that bad statistically, but you have to take into account the huge outliers like Warren Buffet with billions of dollars in savings.
People in the middle of the American wealth distribution have household Social Security benefits around $160,000; half of Americans have retirement savings under $4,500; less than $75,000 of home equity; and other assets around $45,000. If you plan to keep living in your home, that money can’t be factored in to how you live your retirement anyways. A lot of blame has been placed on the demise of traditional pensions for the dismal outlook of retirement for Americans. While pensions were great for those who had them, only 30% or so of Americans had them at their peak in the 1980’s. Many of those who had company pensions lost them when their employers went out of business as well. 401k’s are the most prominent way that many Americans are saving for retirement now. They are great vehicles for saving, especially when your company matches your contributions. But people retiring now, the first wave of those with traditional 401k accounts, only have an average of $100,000 in their plans. If they purchase an annuity with that money, they could guarantee lifetime income, but the amount depends on a lot of different factors.
Multi-employer plans (MEP’s) seemed like a good alternative to traditional pensions because the risk when one company went bankrupt could be easily spread throughout the rest of the companies involved. Union members could also switch jobs and maintain their pension, as long as they stayed in the same industry. But as more companies went bankrupt, the burden really increased for those companies still in business. Many of the current MEP’s are listed in a critical financial state and some bigger companies like UPS have chosen to pay a penalty and withdraw their funds in order to avoid paying for more companies’ employees after they go under.
The bottom line is that a lot of things lined up in America as a worst case scenario for retirement. When times were good, people didn’t save enough for retirement. If everyone had been saving 15-20% and putting it in their 401k, they would be ready to go with retirement savings. If you did, way to go! Buy yourself an annuity with some of the money and invest the rest to cover vacations and inheritances. Social Security would not be at risk if the economy had grown faster and had fewer losses. The ratio of workers to retirees was 5 to 1 in 1960, when retirement financing was not nearly as much of a concern. It is currently 3 to 1 and headed to 2 to 1. Since workers are not coming into the workforce at a fast enough rate to make up for those retiring, Social Security is not increasing in a way that would help make up for 401k losses. Even though Americans got the negative side of all of the what-ifs, there is still hope for retirement. Some of my previous blog posts give ideas for saving more towards retirement and making wise decisions with the money you have already saved will help as well.
Written by Rachel Summit