I just finished watching some really depressing information on CNBC today, information that I know is true, but still shocks the senses out of me when I hear and see it in detail. Americans do not prepare for retirement!
How it is possible that smart people like us (well supposedly smart, that is) just don’t take as much time looking at retirement as they do deciding what to order for dinner from Grubhub? That may be a small exaggeration, but you get my point. We tend to worry about retirement tomorrow a la Scarlet O’Hara in “Gone with the Wind”. So, why are Americans so unprepared for retirement?
America’s Retirement Crisis
According to Bernadette Geis of Price Waterhouse Cooper (PwC), the world famous accounting firm, the majority of Americans are under-prepared for retirement. Even worse, the most disturbing fact mentioned was this:
One in four Americans have no retirement savings at all, and those who are saving, aren’t saving enough.
According to the report, one major reason for this is that “there are not enough cost efficient and affordable plans available” to the workforce! Really? We all know we can create our own retirement plan, don’t we? They’re called IRAs and I have them and at the very least, you should have them too.
Company retirement plans have been on life support for years now and if you are wishing and hoping your next job is going to solve your retirement problem, then you are in for serious troubles ahead.
The retirement outlook is pretty bleak if this is what is waiting out there for retirees. We must depend on good planning and savings in order to have a successful retirement.
It’s bad enough that 25% of all workers have nothing saved for retirement, but the numbers are still scary for those that have attempted to save something.
On average, according to the report, those that are saving have saved so little that it only will afford them less than $1,000 a month of actual cash while they’re in retirement!
The report found that the median retirement account balance for 55-to-64-year-olds, the group that is retiring the soonest, is $120,000. When divided over a 15 year retirement period, it would generate a modest distribution of less than $700 per month. Realistically, retirement can last longer than 15 years, so many retirees will actually outlive their money in retirement.
Will Social Security Provide a Cushion?
The lack of retirement preparedness is leading us down the road into crisis. That’s because the chief back-up plan for retirement is Social Security, and right now that system is projected to be depleted by 2034.
We may eventually have a fix for the system, but keep in mind we have been talking about that for decades and as of yet, nothing has been done to it.
Oh wait, there was one change back in 1990s when Bill Clinton was in office. They increased the amount of taxation on your Social Security benefits! Before 1983 and Ronald Reagan, there were no income taxes at all on those benefits.
But now, you heard it correctly, you may actually have to pay income taxes on that money (depending on your income total). You may have believed those benefits would never be taxed. You may be wrong.
The Root Cause?
According to PwC research, the expenses for employer-sponsored retirement plans provided by small business owners are too much for them to consider retirement plans as a benefit. They are not cost efficient and affordable, and unfortunately these companies represent a very large segment of the U.S. economy.
If you work for one of them, it is imperative for you to fund your very own retirement plan. The federal tax season deadline (extended this year to May 17th) is the end of the line for funding last year’s (2020) plans.
Are There Solutions to the Retirement Crisis?
According to PwC, the proposed solution to solve the retirement crisis in America is to have more multi-employer defined contribution plans in the marketplace for employees of small businesses. This would allow them to pool their resources, similar to the plans available to employees of medium- and large-sized corporations. They project the saving rate would rise dramatically if this were accomplished.
It’s a novel idea, but my fear is that retirement for most is too distant and that the issues of everyday life have become so dramatic that preparing for retirement is something we can’t or just don’t think about.
Can you incentivize people to participate in a retirement plan? Getting people to save more by bundling more benefits and then requiring participants to enroll is being floated around. For example, if we forgive student loans or a portion of any, then a requirement would be that an employee must contribute some or all of that money into the company retirement program (just for yourself, of course).
Education Is Key
Personal finance has been a hot topic for a long time and is finally making a dent in the brains of younger people. This isn’t just about becoming more successful at work, but also must include raising the consciousness of younger people to think about all aspects of life, including retirement.
Teaching personal finance can start with mom and pop, but it must include school too. It may not solve the problems that today’s 50-somethings are facing, but it can help solve the problems of their children and grandchildren.
If you are under age 40, you still have time to prepare properly for those days of retirement. The odds get more difficult the older you are if you haven’t prepared or even started. Don’t be one of those who think that someone else is going to leave you money and that will be your retirement nest egg. Those odds are for suckers and beside, don’t you want to make sure that your retirement is a success? You can’t be sure if it’s not something you control yourself. So make a plan to prepare for retirement today.