The news headlines lately have been trumpeting a looming “retirement crisis” due to a failure of many Americans to save adequately for retirement. However, a recent article in The Wall Street Journal makes the case that just the opposite is actually true, at least when it comes to household retirement savings.
The article shares a number of statistics that debunk the popular notion that Americans are ill-prepared for retirement. The one exception, according to the article, is government retirement plans, which are underfunded by as much as $26 trillion. These include Social Security, the federal Pension Benefit Guarantee Corporation, and government employee pensions.
Enough to Live Comfortably
According to the article, eight out of 10 current retirees who responded to a recent Gallup poll said they have enough money to live comfortably. In the Federal Reserve’s Survey of Consumer Finances, a similar percentage (75 percent) of retirees said they have at least enough money to maintain their standard of living. This is up from 61 percent in 1992.
The poverty rate among those who are over 65 years of age is also falling — from 9.7 percent in 1990 to 6.7 percent in 2010, the article notes.
In addition to these encouraging statistics, the article shares positive data about participation rates in retirement plans. Six out of 10 employees today participate in a retirement plan, according to the Social Security Administration, and this jumps to eight out of 10 married couples. Those who don’t participate in a retirement plan are mostly people on the low end of the wage scale and young employees who will likely join a plan when their earnings rise.
What about contributions to retirement plans? These are rising, too. Data from the U.S. Department of Labor reveals that between 1975 and 1984, total retirement plan contributions by employers and employees averaged 6 percent of employee wages. This has risen to 8.3 percent of employee wages over the past decade.
Also, the amount of money held in employer-sponsored retirement plans and IRAs has risen six-fold since the mid-1970s and is now at record levels, the article states.
Not surprisingly, the result of these positive statistics has been a drastic rise in the income of retirees. Median retiree household income grew by 56 percent above inflation between 1989 and 2016, according to data from the Federal Reserve. During this same time, the median income in working-age households grew by just 4 percent.
Contradicting a Crisis
The article points out that all of this data contradicts what we might expect to see if we were headed for a retirement crisis: low retirement plan participation, inadequate contribution amounts, falling retirement savings levels and stagnating income among retirees.
What’s more, computer models run by the Social Security Administration currently are not projecting a retirement crisis. According to these models, retirement incomes will continue to rise, the poverty rate among those 65 and over will continue to fall, and the percentage of retirees who are unable to maintain their standard of living will remain about the same.
In addition, the median income replacement rate in retirement (of preretirement earnings) for those born between 1966 and 1975 is projected to be 110 percent, the article notes. For current retirees who were born during the Great Depression, the median income replacement rate of preretirement earnings is 109 percent.
A Brighter Retirement Picture
This data paints a considerably brighter picture of the U.S. retirement planning landscape than what most of the media has been reporting lately. But what does it mean for you as a retirement saver?
Simply put, you should be taking advantage of as many opportunities as you can to prepare for a financially secure retirement. This includes joining a retirement plan (such as a 401(k)) at work if your employer offers one, or opening an IRA on your own if you don’t have access to a plan at work. If you own a business or are self-employed, consider establishing a Simplified Employee Pension (SEP) plan.
Once you have joined or established a retirement plan, contribute as much money each pay period as you can. One of the best ways to build your retirement savings is to have a portion of each paycheck automatically contributed to your retirement account. Making retirement saving automatic makes it easy, since you don’t have to think about every payday.
Please contact us if you have more questions about saving for your retirement.