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Many 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. Are you one of them? (Calculator: How much do I need for retirement?)
If you are, it can have a range of implications.
- It may mean cutting back on luxuries, entertainment, hobbies, or travel you had hoped to undertake in later years.
- It may mean adjusting to lower-income living and, perhaps, relying on government assistance.
How did the overall retirement picture become so dim? It came about through a combination of saving changes and investment challenges.
The retirement stool
The fundamentals of retirement saving traditionally relied on the “three-legged stool” model:
- Pensions
- Personal savings
- Social Security
But that model has undergone some changes in the past few decades. Indeed, for a good portion of pre-retirees, one or more of the retirement stool legs may be … wobbly.
Here’s a look at what’s changed for each leg of the stool and what can be done about it.
The pension — or now 401(k) — leg of the retirement stool
Competitive and economic forces have prompted many companies to shift from defined-benefit retirement programs — like pensions — to defined-contribution programs — which are typically 401(k) savings programs. And, of course, some companies offer no retirement benefits at all.
In fact, only about two-thirds of private industry workers have access to an employer-provided retirement plan, according to the Bureau of Labor Statistics.
Of that:
- 52 percent have access only to 401(k) type of plans.
- 3 percent have access only to pension programs.
- 12 percent have access to both.
And even if workers have access to an employer retirement program, only 51 percent on average take advantage of it.
Investment wobbles
Most of those retirement savings are put into market-based investments. But there have been significant shocks in the last two decades.
- 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 wages or business income.
- And then, most recently, a wave of inflation eroded the value of savings.
The result is that one leg of the retirement stool — the pension or employer-provided retirement plan — is wobbly for many people.
How unstable? Consider the following:
- The exact estimates can vary, but the Economic Policy Institute found that nearly half of all working-age families had no retirement savings. Of those who did, the median retirement savings amounted to around $60,000.
- The Federal Reserve, in its survey of consumer data, said that American families had median retirement savings of roughly $65,000.
- And various surveys by banks and financial institutions put average estimates wider still, from as little as $17,000 to upwards of $141,542 with variations for age and other factors.
Those are estimates for just dedicated, tax-advantaged retirement accounts, like 401(k)s and individual retirement accounts. (Related: Savings guide)
Could personal savings and Social Security help stabilize the retirement picture?
The other two legs: Personal savings and Social Security
Personal saving for the American population as a whole is not stellar.
- About 37 percent of working adults would not be able to cover a $400 emergency expense, according to a recent Federal Reserve survey.
- And another survey found that about a third of Americans have less than $100 in their savings account.
As a result, for many people, personal savings are unlikely to supplement retirement income in a significant way.
And Social Security is unlikely to fill the gap.
- The estimated average monthly benefit in 2023 for what the Social Security Administration describes as "all retired workers" is $1,827.
- The maximum monthly Social Security benefit at full retirement age is $3,627 for 2023. (If you delay Social Security until age 70, the maximum you could collect in 2023 is $4,555.)
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)
The retirement stool vs. what you need
Generally, financial experts suggest that you need about 75 percent to 80 percent of your pre-retirement income coming in to maintain your standard of living. To generate that kind of income through personal savings, pensions (if you have one), and investments, you typically need to have at least 6 to 8 times your annual salary saved up.
So, someone making $75,000 a year would need a nest egg of about $450,000 to $600,000 — much more than even the most positive estimates above.
And some financial experts would argue that you may need even more, depending on the age you are when you retire, the type of investments in your retirement portfolio, and your lifestyle.
For instance, a common rule of thumb is that you should only withdraw about 4 percent of your retirement savings in the year you retire, adjusting each year thereafter to account for inflation. With savings of $600,000, that would amount to $24,000 a year, or $2,000 a month. But many people have living expenses well above that. (Related: The ideal retirement portfolio withdrawal rate)
Additionally, people are living longer. Indeed, a child born today can expect to live well beyond 76 years old, according to the Centers for Disease Control and Prevention. Such longevity gains mean that retirement savings need to stretch out longer.
What is being done
All of which makes for a bleak retirement picture for many people. And they know it.
Indeed, less than a third of pre-retirees believe their retirement savings plan is on track, according to the previously mentioned Fed survey.
Luckily, there are broad measures under way to address the problem.
- Recently passed legislation will open the door to retirement saving for a greater number of workers by requiring more companies to offer retirement programs and automatic enrollment.
- That and other law changes also pushed back the age when people are required to tap their retirement savings, which allows those savings to potentially deliver tax-deferred growth for longer. It may also encourage people to work longer and use catch-up savings strategies to make up for any savings shortfall.
- More companies (more than 1 in 4 according to one survey) are offering financial wellness programs. And participation in such programs typically leads to better preparation by workers for retirement.
- The financial sector is sharpening its focus on product innovations in protected lifetime income solutions, specifically annuities. And, owing to the previously mentioned legislative changes, annuities may start to become more accessible through retirement plans.
“Annuities offer a way to establish an income stream in retirement,” said Jon Preston, CFP ®, a financial professional with Commonwealth Financial Group in Needham, Massachusetts. “While every situation is different, many annuities offer steady, reliable income that provides piece of mind for older Americans. And annuities come in many flavors, which means they can help meet a variety of goals. A qualified financial professional can help explain if an annuity is the right choice given a client’s goals, risk tolerance, and timeline.”
What you can do
Beyond these overall developments are moves individuals can take in the face of the retirement savings crunch.
The most obvious, of course, is to save.
“The art of retirement is to start saving as young as possible, so you give yourself the best opportunity to have consistent funds when there is no more income being produced by an occupation,” said Jason Applebaum, a financial professional with Coastal Wealth in West Palm Beach, Florida.
But even those not starting out their savings program young can still make progress by setting up a disciplined budget and looking at catch-up options available in retirement savings programs. (Related: How to save for retirement in your 40s and 50s)
Those on the cusp of retirement or already in it may have other options to generate additional income as well by tapping into their home equity or being strategic with their Social Security benefits claiming strategy. (Related: Retirement savings catch up: 3 moves)
Ideally, a combination of these type of moves supplemented by financial vehicles like annuities could offer many people a way to a better retirement than what their savings math currently looks like. A financial professional can help sort out the options.
Conclusion
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 the industry to develop innovative answers are important first steps. The key is keeping the momentum moving forward.
Discover more from MassMutual…
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