Retirement: Who’s ready, and who’s not?
Here’s the good news: Half of Americans are “on track” financially for retirement.
The bad news? The other half aren’t.
This is the main finding from a new report on “retirement readiness” in America, published earlier this month by the Employee Benefit Research Institute (EBRI) in Washington.
I’ve taken some liberty in summarizing the findings. But within rounding error, it’s a “glass half full, glass half empty” story.
Or is it?
Retirement readiness estimates for the U.S. population are notoriously sensitive to their initial assumptions—including how much a person needs in retirement. The EBRI study, like others, sets forth a retirement income goal (basic living expenses plus out-of-pocket health costs). Based on that goal, about half of Americans are prepared, and half aren’t.
But here’s an interesting wrinkle. Among the half of Americans who are unprepared, it turns out that 3 in 10 are at 80% or more of their goal. In other words, they are falling somewhat short—but not dramatically so. The other 2 in 10 unprepared Americans are further behind, meaning they are at less than 80% of their income goal. Many in this latter group are low-wage households, struggling to save.
This, to me, is a more realistic appraisal of retirement readiness in the U.S. Half of the population is on track—congratulations, and keep it up! Another 30% of Americans are making an effort but need to do more. And 20% of Americans are much further behind, and will struggle to reach a reasonable goal given their incomes.
To help close the retirement savings gap, Washington has a number of ideas, like tax incentives for low-income savers, or more retirement accounts at small businesses. Policy can have an impact. For example, the EBRI report mentions that recent changes to 401(k) plans (such as automatic enrollment) are improving retirement readiness.
Yet the savings challenge goes beyond the mechanics of tax incentives or retirement plan offerings. It gets to the heart of the decline in saving in the U.S. in recent decades, which is more cultural and attitudinal in nature. For all of us, improving retirement readiness has also got to be about changing the broader culture—from one glorifying consumption to one glorifying saving. This cultural shift seems particularly critical to the 3 in 10 Americans who are “close to goal” but need to do more.
For the moment, a close reading of the EBRI report is a reminder that all is not quite doom and gloom. There are many Americans on track for retirement—or getting close to readiness. But with headwinds coming from Social Security and Medicare (benefits will likely be lower in the future), it seems cultural change is indispensable if we truly expect to transform the outlook for retirement readiness in the U.S.
Note: The link to EBRI.org will open a new browser window. Except where noted, Vanguard accepts no responsibility for content on third-party websites.
Very interesting article, thanks. Keep up the good work.
If the cultural shift is critical to the 30% who are “close to goal,” I think it is even more critical for the 20% who are further behind. Among those in the bottom 20% in retirement readiness, many live in households with cell phones, computers, high-speed internet, two cars, two or three TV’s, satellite or cable TV service, and lots of other services and “stuff” beyond what they really need. Not to mention smoking, expensive eating habits, etc.
I have close relatives in the bottom 20% and they refuse to change their mind set. Extremely hard to help people who will not listen to good ideas.
If medicare benefits will be lower I suppose that means private secondary insurance will be asked to pay more and that will drive up premiums. Oh well…..
One of the first things that Washington should do is dramatically increase the amount of money that we can contribute to an IRA. $5000.00 a year just doesn’t cut it.
The worst case scenario for a saver is loss of a job at 60 and spending savings to live and no job in site at 62. Some of us saved all our lives and invested only to find our Retirement Savings shredded monthly by job loss. The real jobless picture is much more serious than is fully reported.
Very interesting article. The EBRI article doesn’t talk much about future impacts of legislation on the ongoing funding of retirement. The uncertainty over Capital Gains taxes raises an issue for those of us retirees who annually sell a few shares of stock for next years expenses (while letting our IRAs and 401ks grow). If the Cap Gains rate goes to only 20%, and with all other things being equal, one will be required to sell an additional 33% of shares just to realize the same amount of net return. Or am I missing something?
And, what will happen to the economy when everyone starts to save and ceases to spend at will? Who will have an income to save then?
if you’re selling $100k to yield $85k, then 20% cap gains means either yield of $80k or sale of $106.25 K, depending on which side you want to keep constant. Nothing like 33% more! a little over 6% more. Tax hysteria is all too common, and a little math deflates it nicely. of course, if you want to say it’s a third more of the shares, out of the total sale, that go to tax, you are technically about right, but presentung a statistical distortion.
Steve, Just so I understand the math: “of the 50% who are unprepared, 3 of 10…” Doesn’t this mean that 30% of 50% , or only 15% are making some progress. If this number is correct, glass is not quite half full.
Thanks
I liked the article very much and found it informitive as well as helpful. Thanks.
A good article but I wonder what would happen to our consumer-driven economy if everyone, tomorrow started saving another 10% of their income? Things are going to be grim either way I think.
I can relate to the Aug. 6th posting. We are now living on 1/3 of our previous income due to a merger which resulted in the loss of our primary income. Congratulations on 25 years of service! Three months later, there’s a walk to the company’s front door immediately after being let go.
That was four years ago. After cutting back and draining everything to make up for the other 2/3rd’s, we are at the point of having to draw on our 401K. We are both 57.
We will have to pay the 10% penalty. Instead of being part of the “almost there, but need to do more” group, we will probably have little to nothing left by retirement.
I returned to school (adding financial aid to our debt) to update my degree with an accounting degree. Without experience and with the current job market, I doubt I’ll be able to improve our income much.
So, personally, I think things are much worse than reported.
While I find no fault in grammar, spelling or punctuation, where was the mathematically adept proofreader? “Among the half of Americans (50%) who are unprepared, it turns out that 3 in 10 (30%) are at 80% or more of their goal. …. The other 2 in 10 (20%) unprepared Americans are further behind… ”
What about the other half of those unprepared for retirement – ie 50% times (30% plus 20%) leaves one quarter of Americans’ status unreported.
To the person who posted on Aug 28: first, I sympathize with your situation. Second, I suggest you check with a CPA or a fee-only CFP (Certified Financial Planner). I believe you may be able to avoid the 10% penalty on at least a portion of your withdrawals as follows.
1. Since your job has been terminated, you should be able to roll over your 401(k) into a traditional IRA.
2. You might wish to then roll over a portion of the money into a different traditional IRA (or perhaps several) to allow more flexibility.
3. You could then have at least one IRA where you make a 72(t) election. You can then make withdrawals from that IRA starting before age 59.5 without penalty, but you must make the withdrawals at least once a year in substantially equal amounts over the life or life expectancy of you or of you and your beneficiary. There is some basic information on this option in IRS Publication 590.
4. If you have at least one IRA where you do not make a 72(t) election, you could use that IRA for additional funds as needed (i.e., for flexibility), and you would have to pay the penalty only on those withdrawals, and only until age 59.5.
The Aug. 28th post says, “Thank you” to the Aug 30th post. I will definitely check out the 72(t) election.
All excellent points, including the mathematical errors… I, recently retired feel I’m in the top 50% who thinks I’ll make it to my grave before I run out of money. But you know what? You just never know for sure. With the world, US and state economies where they are I’m not sure of anything anymore. I’ve got one son at home with a masters degree that can’t find a job, two elderly in-laws that have no money or house to live in, and I just retired!!! This should be interesting!! I hope for the best, plan for the best but I’m always looking behind me…