An important and serious conversation, one with implications for millions of Americans, needs to take place. And soon. Because our country is facing a looming retirement income crisis.
What exactly does that mean? Simply put, it means those people retiring from the workforce may not have the money necessary to maintain the standard of living they have become used to during their working years.
On a personal level, that can have a range of implications. For many, it may mean cutting back on luxuries, entertainment and activities, or travel they had hoped for in later years. For others, it may mean adjusting to lower-income living and, perhaps, relying on government-assistance. (Calculator: How much do I need for retirement?)
In turn, more people needing help in their later years is a development that has consequences for society, as community resources and support programs would take a greater share of taxes and other government generated revenue.
Why has this crisis come about?
The fundamentals of retirement saving have evolved from the “three-legged stool” model of pensions, personal savings, and Social Security. But Americans, by and large, haven’t adjusted with it.
For instance, competitive and economic developments have prompted many companies to shift from defined-benefit retirement programs, like pensions, to defined-contribution programs, like 401(k) savings programs. But many workers don’t have access or fail to take advantage of such programs. And beyond that, many don’t build personal savings as well. Additionally, they over-estimate the support Social Security will provide. (Quiz: Know your Social Security essentials?)
At the same time, the investment landscape has also changed. The market corrections of 2007 and 2008 had negative consequences for retirement plans dependent on equities. The low interest rate environment that followed also wasn’t beneficial for most traditional saving strategies. The economic downturn of the COVID-19 pandemic exacerbated the situation by forcing many to tap retirement savings to make up for lost job or business income.
The combination of changing retirement fundamentals and market conditions means many of those approaching retirement don’t have the resources they planned on.
However, there are opportunities to forestall this crisis, as greater numbers of people take advantage of financial wellness programs and the financial sector sharpens its focus on product innovations in protected lifetime income solutions. Additionally, the solution will need to shift the retirement planning mindset and financial planning culture from savings and accumulation only, to savings, accumulation and protected lifetime income
Retirement savings lacking
Americans, for the most part, have not saved enough for retirement.
The exact estimates can vary, but the Government Accountability Office (GAO) in 2017 found that the median retirement savings for Americans between age 55 and 64 was $107,000. The Federal Reserve, in its survey of consumer data, said American families had median retirement savings of roughly $65,000. And various surveys by banks and financial institutions put estimates wider still, from as little as $17,000 to upwards of $172,000.
Regardless of what estimate you consider, they are all far short of what most people need. Generally financial experts suggest you need about 75-80 percent of your pre-retirement income coming in to live at the level you are used to. To generate that kind of income, you generally need to have at least 6-8 times your annual salary saved up. So, someone making $75,000 a year would need a nest egg of about $450,000-$600,000, much more than even the most positive estimates above.
And some financial experts would argue you may need even more, depending on the kind of investments involved and your living situation. For instance, a common rule of thumb is that you should only withdraw about 4 percent of your retirement savings per year. With savings of $600,000, that would amount to $24,000 a year, or $2,000 a month. Many people have living expenses well above that. (Related: The ideal retirement portfolio withdrawal rate)
Of course, those are estimates for just dedicated, tax-advantaged retirement accounts, like 401(k)s and Individual Retirement Accounts. Personal savings and Social Security factor in as well.
But there, too, many people fall short. According to MassMutual’s 2018 State of the American Family survey, more than half (52 percent) of families with household income of $50,000 or more and at least one dependent had less than three months’ worth of readily available savings set aside. Roughly 8 percent had nothing at all.
And Social Security is unlikely to fill the gap for many people. The estimated average monthly benefit in 2021 for what the Social Security Administration describes as "all retired workers" is $1,543. The maximum monthly Social Security benefit at full retirement age is $4,210 for 2021. However, the maximum allowable benefit amount is only payable to those who had the maximum taxable earnings for at least 35 working years. So, depending on when someone retired and what he or she made, the benefit could be considerably less. (Learn more: Filing for Social Security benefits)
All of which makes for a bleak retirement picture for many people. And they know it.
Indeed, the greatest worry among those facing retirement is not having enough money to enjoy themselves, according to research conducted by MassMutual. In fact, compared to those already retired, those approaching retirement are much more likely to express concern about other income issues, such as changes in Social Security, falling short on income in retirement, and low interest rates not offering a good return.
What can be done?
Luckily, there are movements under way that could help to alleviate the crisis.
One is that many sectors of society with a stake in this situation — industry, government, academia, and most importantly, consumers themselves – are beginning to understand the need for fundamental changes in the retirement landscape and coming together and building organizations to discuss it.
The Alliance for Lifetime Income is one such example. It is a nonprofit formed and supported by some of the nation’s leading financial services organizations, including MassMutual, to create awareness and educate Americans about the importance of protected lifetime income.
Through various events and forums, the group looks at specific issues, like:
- Changes in labor markets and savings patterns, and the gaps or needs they create.
- What role current solutions like 401(k)s and IRAs play.
- Product innovations in protected lifetime income solutions (e.g. the evolution of annuities to keep up with the retirement landscape).
- The need to shift the retirement planning mindset and financial planning culture from one focused merely on savings and accumulation to one that considers the need to guarantee income in retirement.
“One of the things that the Alliance for Lifetime Income talks about is that the shift from defined-benefit to defined-contribution plans has put the burden of navigating the financial retirement risks onto the consumer,” said Chris Coburn, MassMutual’s head of annuity marketing. “The accumulation mindset has always been there, but the mindset we are missing is the ‘decumulation’ mindset. That means getting consumers to ask: ‘How do I spend the money that I have accumulated while making it last for as long as I live, while overcoming inflation, market loss, and all the uncertain things that were previously on the employer to worry about as they paid out a benefit.’ This is why innovation in the predictable income space is so important, because it helps in the ‘decumulation’ phase and shifts some of that burden back to financial institutions.”
In addition to these efforts, consumers themselves are beginning to become more active in managing their retirement planning. Financial wellness programs are on the rise, due in part to more employers offering such programs in the workplace. And participation in such programs typically leads to better preparation for retirement.
In fact, it’s financial planning services and Social Security counseling that workers are most interested in receiving through benefit programs from their employers, according to MassMutual benefits research. And it’s the millennial segment that is most interested, with seven out of 10 saying they would welcome financial and retirement planning assistance.
Obviously, there is still a long way to go to make the nation’s overall retirement numbers add up. But the growing financial awareness among consumers and efforts by industry to develop innovative answers are important first steps. The key is keeping the momentum moving forward.
Learn more from MassMutual…
This article was originally published in April 2019. It has been updated.