It is difficult to understate how unprepared many Americans are for retirement. Personal savings rates, in general, are still below historical levels. Politicians, and well-meaning economists, tend to cite the reasons for the lack of retirement savings as falling into three categories: a lack of personal discipline among Americans who are choosing spending over saving, underfunded public pension plans, or defined contribution plans that have maximum contribution amounts that are too low for what Americans will need in retirement.
To be fair, all of these may play some role. For many Americans, the growth of mutual funds gave birth to an explosion of 401k plans as employers were compelled to offer retirement plans as part of a benefits package to attract the best workers. The baby boomers were the first generation to benefit from these plans, but many of those employees saw their portfolios take a big hit after the dot com bubble burst. Many of these employees’ portfolios never recovered due, in part, to lower risk tolerance. And on the heels of the great recession of 2007-2008 many employees are leery about participating in the market.
Are Americans simply choosing not to save?
However, all of the above arguments start with the assumption that Americans have money to invest in a retirement plan. A recent article in Barron’s outlines a less comfortable reality. Many employees simply do not have adequate income to set aside money for retirement. And the less money that an employee earns, the less likely it is that they will be eligible to participate in a retirement plan of any kind. In fact, the Barron’s article pointed out that 58 percent of bottom-quartile earners have no access to an employer-sponsored retirement plan. And if they do, they are contributing at levels far below the threshold allowed to receive the maximum employer match. For many employees, and not just employees on an entry-level salary, even a 1-2 percent contribution of pre-tax income to a company-sponsored retirement plan is a hardship when compared with their required living expenses.
Even employees in a higher tax bracket are finding that more of their salary is being taken up in long-term care planning for themselves or for an aging parent. And even despite the clear benefits of compounding that comes from setting aside money for retirement as early as possible, younger workers are balancing saving for the distant future with repaying thousands of dollars in student loans. Whatever the reason, there is more to the retirement savings crisis than a lack of desire or personal discipline.
Fewer employers are offering retirement plans
Another problem with retirement planning is that even when employees have the ability to contribute to a workplace retirement plan, the employer does not offer a plan as part of their benefits package. As health care costs have risen, many small businesses have eliminated this benefit, or never started one, to begin with. According to the Center for Retirement Research, one-third of all private sector workers do not have access to a retirement savings plan. For part-time workers, the number is 63%. For firms with less than 100 employees, the number is 47%. Overall, as of 2016, only 30% of Americans households had access to a defined-benefit plan (pension plan) and only 52% participated in a defined-contribution plan (401k, etc.). This leaves saving for retirement up to the employee who may lack the knowledge and access to advisory services for investing and retirement planning.
Many employees are also taking themselves out of the workforce
And to make the issue even more complex, there are fewer employees who are eligible to take advantage of employer-sponsored retirement funds. The “gig economy” is alive and well. But while many employees, including a growing number of workers of older workers, are embracing the work-life balance that comes from not being “on the clock”, these employees are also not eligible to take advantage of their company’s retirement plans.
Is the retirement savings problem likely to change?
The reality is that it’s unlikely any of these core issues are going to change anytime soon. The ripple effects from the Great Recession are still working their way through the economy. However, one of the fundamental features of the American economy is that Americans find a way to adapt. In the case of retirement planning, many Americans are redefining their retirement goals. In the late 1980s and 1990s, the idea of retiring at 55 or even earlier went from a goal to an expectation.
Today, many Americans are realizing they want to work even past what many consider to be “retirement age”. And for some, they are finding fulfillment by reinventing their career later in life. Many retirees, often with the help of a financial planner, are embracing a more modest lifestyle and finding that a smaller house – or even no house – may serve them better in their retirement years.