Writing about America's abysmal retirement savings rate is tricky.
Mention the substantial sums needed for a comfortable retirement, and many people simply give up. The amounts seem so vast and their ability to save so minimal that they don't even get started.
Whitewashing the issue isn't the answer, though. The truth is that unless something changes, big chunks of Americans are going to be in a world of hurt when they can no longer work.
- Calculator: How much do you need to retire?
And the frustrating thing is that it wouldn't take that much effort for most people to dramatically improve their odds of having enough money in their final years.
Let's look at the latest grim statistics:
- One in four workers has nothing or virtually nothing saved for retirement. The Employee Benefit Research Institute, which conducts an annual retirement confidence survey, found 26% have less than $1,000 put aside, up from 20% in 2009.
- More than half (54%) have less than $25,000 saved, EBRI found. Unless you're still in your 20s, that amount of savings is weak.
- Fewer than one in five workers is on track to retire comfortably, according to a recent Hewitt Associates analysis of more than 2 million workers at 84 large U.S. companies. Most won't be able to maintain their current standards of living, and many will have to cut spending dramatically, the study indicated.
Hewitt figures that workers without traditional pensions would need to save 15.7 times their final annual pay to maintain their current living standards. Social Security, as currently structured, would provide benefits averaging 4.7 times pay, the Hewitt study said, leaving workers to come up with a nest egg equal to 11 times final pay.
(Figuring your final pay involves a guesstimate, but a rough rule of thumb is that, with 3% annual raises, your annual pay will double every 24 years. So someone earning $50,000 at age 40 would expect a final annual salary of about $105,000 at 65 and need a nest egg of a little more than $1.1 million.)
Hewitt came up with its estimate by adjusting pay levels to account for post-retirement inflation as well as lower tax and savings rates (most people won't be saving for retirement once they're in retirement). The figure also captures higher medical costs after retirement.
People who retire with too little money saved can make their money last by chopping their spending. But it's unlikely many will, because:
- Many may not know they don't have enough. If they don't consult qualified financial planners, they probably won't realize they're withdrawing too much from their nest eggs.
- Cutting back on lifestyle is hard at any age, especially when people would have to cut their spending by 25% to more than 50% to make their money last.
So it's pretty clear that if things continue as they are, a whole lot of people will run through most of their savings before they've run out of life.
You can quibble with anyone's estimate of retirement income needs, since there are so many variables involved, including how long someone will live and in what state of health; the inflation rate, both in general and for medical costs; and how investments will perform.
A few financial planners have criticized traditional retirement estimates as being too high. They say most people's spending falls over time in retirement, rather than rising as most calculations assume.
Other important points from the Hewitt study:
- Workers who aren't covered by traditional pensions are on track to accumulate only 74% of the money they'd need to maintain their standard of living. The dwindling number who are covered by pensions along with 401k or other defined-contribution plans are expected to have 91% of what they need.
- Those who aren't saving now are in the worst shape of all. Assuming they start contributing eventually, they're likely to accumulate less than half (43%) of what they need.
- Early retirement (at age 62) "significantly increases the shortfall employees will see at retirement" because of fewer years of saving, higher medical costs (Medicare doesn't kick in until age 65) and a longer period of retirement to cover. On average, early retirees would have just 65% of the funds they needed to maintain their lifestyles, Hewitt found.
- Late retirement (at age 67) dramatically improves the chances of having enough money, thanks to more years of saving, increased Social Security benefits and a shorter retirement period. Late retirees would have 98% of the money needed, Hewitt found.
Continued: Ramp up your savings over time