July 24, 2012 — Recent studies from the Employee Benefit Research Institute and the Boston College Center for Retirement Research paint a pessimistic picture of retirement. Teresa Ghilarducci, a professor of economics at the New School for Social Research, cites much of their data in describing the American approach to retirement as ridiculous. She goes on in a recent New York Times Op-Ed piece, “Our Ridiculous Approach to Retirement“, to posit that new retirement accounts should be mandated, on top of Social Security, in order to prevent future generations from a poverty stricken retirement.
Although we wonder about Prof. Ghilarducci’s statement* that “seventy five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts”, her message is correct: Americans in an age of disappearing pension plans have not saved enough for retirement. According to her figures, 49% of middle class Americans will be poor in retirement. While Ms. Ghilarducci’s figures are for an “individual”, the number from the Federal Reserve’s 2010 Survey of Consumer Finances (SCF) that we see consistently quoted is by “household” – a typical household headed by someone 55-64 has $120,000 in combined 401k and IRA assets. That amount would provide a theoretical $575 a month to the household. Add to that the typical individual Social Security benefit of $1230 month, plus an estimate $615 spousal SS benefit, and you get a total household income of $2420 (or $29,040 annually). That’s about 2 times the 2012 poverty level for a 2 person household, but by no means much money.
A big part of the “Ridiculous” article centers around denial – the inability of most Americans to do what needs to be done to prepare for retirement. We don’t have a plan, we don’t save enough, we don’t invest wisely, we start saving too late, and we trust financial advisors who aren’t always that great. Another problem with the current retirement system is not our fault – more and more Americans are losing their jobs before their expected retirement age, and are not able to replace those jobs with ones of equal pay.
If we were in charge
These are sobering reports. We agree that something needs to be done, although we are just not sure this idea will gain traction. However we do agree with suggestions from the Center for Retirement Research that firms offering 401ks should have automatic enrollment for their employees, and more restrictions should be placed on loans from these funds. In our opinion too many people rely on them as piggy banks, which does not help their retirement planning.
In the meantime we are grateful that, according to our recent survey, more than two thirds of Topretirements members feel comfortable about the financial aspects of their retirement.
* (Regarding the confusing quote in the second paragraph)
Special thanks to Mary Ellen J, who found the source of this quote from the Schwartz Center for Economic Policy Analysis at the New School. Looking at the original source, it appears the NY Times quote was missing the qualification about annual income contained herein: “Three quarters of near retirees (ages 50 to 64) have annual incomes below $52,201, with an average total retirement account balance of $26,395 . When stretched out into an annuity over an average retirement lifetime, this sum does not provide a significant addition to a monthly Social Security benefit. Further, the median value of retirement account balances for half of near retirees is zero, meaning that over half of this group has no retirement savings.”
Comments? Please share your thoughts about this study and about what could be done to safeguard future generation’s retirements. If you were in charge, how would save American’s retirements!