RETIREMENT CRISIS IN THE US
The United States is facing a retirement crisis. Americans know they won’t have enough money for retirement, but they still won’t save.
The average retiree will need around $1 million to provide an income of $5,000 per month for 30 years. However, the average 50-year-old only has around $43,000 saved for retirement. Furthermore, 45 percent of Americans have nothing saved for retirement, and 38 percent don’t actively save for retirement. It’s not surprising then that 80 percent of Americans between the ages of 30 and 54 believe they will not have enough saved for retirement.
By Robert Spendlove
Zions Bank’s Economic and Public Policy Officer
Social Security isn’t intended to be the sole source of income for retirees. It is designed to supplement other sources of retirement income. However, many people now are completely dependent on it for support. In fact, 36 percent of Americans older than 65 rely entirely on Social Security for support. Unfortunately, Social Security is running out of money, and will only be able to cover 77 percent of benefits by 2034.
For many years, workers relied on generous pension plans to provide for them in retirement. These “defined benefit” plans required little direct supervision on the part of the beneficiary. The promise was that if an employee committed to work for a company for a set period, often around 30 years, the employee could expect regular payments throughout her retirement years. However, pension plans are disappearing, replaced by “defined contribution” plans such as the 401(k) that require much more active planning and maintenance to achieve goals in retirement.
Health Care Costs on the Rise
One of the largest expenses retirees can expect is providing for their health care needs. These costs can add up quickly and can decimate retirement accounts. The average out-of-pocket medical costs for a 65-year-old couple could be as much as $218,000 during a 20-year period. Adding to the problem is that health care expenses are expected to rise by around 6 percent per year. And Medicare only covers 62 percent of the average American’s medical expenses.
Addressing the Problem
It’s not a lack of knowledge that holds people back; it’s a lack of discipline. It’s difficult to set aside money that could be used right now for a new car or vacation when retirement may feel so far away.
Behavioral economists have proposed several remedies to help people better plan for retirement. These suggestions can be implemented by employers who are designing retirement plans for their employees or by individuals who are planning for their own retirement.
Encourage automatic enrollment and automatic payroll deductions. Most people can save a few dollars a day for retirement but struggle to save hundreds of dollars per month or thousands per year. Automatically enrolling people in workplace retirement accounts with regular payroll deductions reduces the shock of setting aside large amounts of money for retirement.
Reduce investment options. When investors focus on broad-based mutual funds or target-date funds, they don’t have to worry about returns on individual stocks. This reduces confusion and stress about where to invest for retirement.
Discourage withdrawals and loans. If people view their retirement savings as off limits they are less likely to use or borrow from them before they are needed in retirement.
Show people the impact of saving and how their money will be used in retirement. Many tools now exist to help people understand their needs in retirement and whether they’re on track for success. By modeling different scenarios, workers can see what they will need and plan better.
Plan to work longer and save more. The line between working and retiring is getting blurrier. Many people may have to delay retirement until they are older and others may have to continue working during retirement.
Plan Early and Be Ready
Retirement should be a time to relax and enjoy life. However, for this to happen, it is imperative that Americans start planning now for a financially secure retirement.
To read more economic news compiled monthly, please view our Economic Snapshot report on www.zionsbank.com/economy.