Millions of people will need to lower their standard of living in retirement because they haven’t saved enough, according to a recent report by the Center for American Progress.
The report found an American public that is struggling to prepare for retirement and one that is less prepared than previous generations. In addition, a large portion of individuals may have to rely on family, charity and government aid programs for financial support and forgo their pre-retirement lifestyles.
Three clear trends illustrate the extent to which people are underprepared for retirement, according to the report.
• A large percentage of people are saving nothing for retirement. Approximately 31 percent of Americans reported having zero retirement savings and lack a defined-benefit or pension plan.
Among respondents nearest to retirement, ages 55 to 64, the share that reported having no savings was 19 percent, or approximately one out of every five near-retirement households.
One reason is the lack of access to workplace retirement plans. As of 2014, only 65 percent of private-sector workers had access to a retirement plan through their jobs, and only 48 percent participated in one, according to the report.
And studies show that the share of private-sector workers with access to workplace plans is actually lower now than it was in the late 1980s.
• Families that are saving often have insufficient assets. As defined-benefit pensions become increasingly rare, workers need to build up savings in defined-contribution plans such as 401(k)s or in individual retirement accounts (IRAs), the report found.
However, as of 2013, the median retirement account balance among all households headed by people ages 55 to 64 was only $14,500. After excluding households that had saved nothing, the median account balance of near-retirement households was still only $104,000.
If all of this money was used to purchase an annuity that would pay a guaranteed monthly income for the rest of the individual’s life, this income would provide only about $5,000 per year in retirement, the report said.
• Households should increase their savings relative to prior generations but they are not doing so. One simple way, according to the Center for American Progress, to measure how capable households will be of maintaining their standards of living in retirement is to look at the ratio of their total wealth to their income. This gives an idea of how much in total assets a family has built up relative to approximately how much they consume in a given year.
Christian Weller, one of the authors of the report, said that after taking many factors into consideration such as pensions, Social Security and home equity, “The rule of thumb for the wealth to income ratio is about 10 to one, meaning a person making $50,000 for the majority of their career would need about $500,000 to maintain their standard of living in retirement.”
These ratios did improve for near-retirement households during the 1990s and early 2000s, but collapsed following the Great Recession and have shown no signs of recovering. According to data from the Survey of Consumer Finances, households near-retirement age were worse off in 2013 than they were in 1989.
This represents an even bigger problem for retirees because their needs have grown significantly in recent decades, according to the report. Life expectancy has increased, and the retirement age for full Social Security benefits has risen to age 67.
Health care costs have also risen substantially, and the decline in real interest rates since 1983 means that a given amount of wealth accumulated today produces less retirement income than it would have in previous decades.
For all of these reasons, the Center for American Progress says workers should be approaching retirement with greater wealth relative to their income than previous generations did.
However, the opposite is occurring, which may force people to continue working beyond when they intended and they may need to rely on families, charities and government aid to make ends meet in retirement.
Source: Financial Advisor