The destructive effects of the financial crisis may be waning, but your retirement account won't soon forget. Savers lost 40% or more in the downturn -- a collective $2.1 trillion disappeared from 401k and IRA assets in 2008 alone -- and while the recent stock market recovery may feel good, it's done little to stem a mounting crisis in the retirement system in the United States.
It's not just investments that are the problem: Social Security needs financial resuscitation, and the bursting of the housing bubble that helped spark the financial crisis vaporized the home equity many people were counting on to fund their golden years. Corporations are curtailing traditional pensions, and older Americans are being forced to work longer to make up the difference.
Where does this leave our retirement plans? Ask a middle-class American when he plans to retire, and more often than not you'll get a wry chuckle and "I'll be working until I die." The attempt at humor masks what may be close to reality for some people.
The retirement-savings system in the U.S. is "a failed experiment," said Teresa Ghilarducci, the Bernard Schwartz professor of economic policy at the New School for Social Research in New York.
The U.S. system is "headed for a serious train wreck," said John Bogle, the founder and former chief executive of the Vanguard Group, in testimony to a House committee hearing on retirement security in February.
Separately, Ghilarducci and Bogle have called for substantial changes to the current system, but even those who like what we've got now say it needs improving -- and certainly demands better financial education be offered to savers.
"Many people are very overwhelmed with the notion of retirement," said Gregg S. Fisher, the president and chief investment officer of Gerstein Fisher, a financial advisory firm. "How much do we need to put away? Where should it go? How should I invest?"
More from MSN Money and MarketWatch
Living-standard shock
Of course, people's retirement outlooks vary widely. Some 20 million workers still participate in traditional pension plans and employers pay pension benefits to millions more retirees (that doesn't even count government-sponsored public plans), according to Boston College's Center for Retirement Research.Those workers are sitting a lot prettier than the more than half of U.S. families that aren't covered by any kind of pension at their current jobs, according to the Employee Benefit Research Institute, a nonprofit, nonpartisan group. Still, even a well-prepared person may get thrown off by a job loss or unexpected health care costs. (Average medical costs in retirement can run into the six figures even for those covered by Medicare, according to EBRI.)
And those lucky people with traditional pensions likely are wondering how long the money will last as the financial crisis shreds employers' ability to fund such plans for the long haul. (Read "Companies' pension problems could hit taxpayers.")
Video: Managing your faltering 401k
Defined-contribution plans such as 401k's have largely taken the place of traditional pensions: 67% of workers say they have a DC plan, up from 26% in 1988, while 31% of workers participate in traditional pensions, down from 57% in 1988, according to EBRI.
But while lower-income workers face a worrisome retirement reality all their own, middle- and upper-middle class workers likely face the biggest living-standard shock. That's because lower-income people can replace a good chunk of their pre-retirement income with Social Security, and high-income people generally have enough personal savings. But middle-class workers may see their relatively comfortable life change drastically come retirement.
"People in the middle and upper-middle have highly variable rates of savings," said Eric Toder, a fellow at the Urban Institute, a nonprofit, nonpartisan research center in Washington.
Social Security will take up some of the slack, but the program was never intended to provide full wages. It replaces about 57% of lower-income workers' pre-retirement wages, about 43% of medium-income earnings and 35% of higher-income earnings. A replacement rate of 70% to 75% usually allows retirees to maintain their standard of living, according to a report by the Center for Retirement Research.
And Social Security's and Medicare's financial outlook means that future retirees likely will find the programs pay even less. Without changes, the Social Security trust fund is expected to run out in 2037, and Medicare will be broke by 2017. The financial outlook for both programs has worsened as the recession and 6 million job losses have shrunk tax revenues.
Rate this Article
High
