The title of this post are not my words…they are the words of SEC Commissioner Kara Stein. She compares current retirement income trends as a “tsunami…that is fast approaching”.
In the not so distant past, retirement income was comprised of the so called “three-legged stool” of Social Security, employee pensions and personal savings. In 2018. that three-legged stool is more like a balance beam that individuals often need to shore up on their own.
Less than 1 in 5 private sector employees participate in a traditional defined benefit pension plan according to the US Bureau of Labor Statistics. This is a far cry from the over 80% participation for large employers in the early 80’s. Of course, this is a race to zero as fewer and fewer employers offer a pension plan and many are discontinuing in-force plans.
Public employee plans are not without fault. Although not disappearing at the rate seen by their private counterparts, states and municipalities face ENORMOUS unfunded pension liabilities. According to the 4/16/18 Investors Business Daily article linked below:
Pension Crisis: As the media relentlessly focus on the federal government’s burgeoning debt, a new report says that states face their own ticking debt bomb: the exploding liabilities for lavish state and local public-employee pensions. Reform won’t be easy, but there is no choice.
A new report by the Pew Charitable Trusts shows that the problem is getting out of hand. In 2016, the most recent full year for which data are available, states were more than $1.4 trillion in the red. Pension debt has increased for 15 straight years, and shows no signs of abating.
These unfunded liabilities are present even after the roaring bull market present for most of the last decade. Time will tell if the requisite political will is present to address this (my hunch: it’s not).
Social Security’s own website warns that at current benefit levels the trust fund reserves will be exhausted in 2034. At that point, the administration projects that benefits will be cut by over 20% to meet the scheduled benefits.
I suspect changes will be pushed off into the future and ultimately addressed in a hasty, stop-gap manner. That’s just what politicians do. Time will tell when that will happen and how it will impact recipients. But I don’t think it is unreasonable to think that future beneficiaries will have to pay more in and/or recieve less than previous generations.
The only leg of the stool that we directly control is personal savings. This can come in many forms: IRAs, employer sponsored plans (401k/403b) or simply non tax advantaged savings. I have seen studies claiming that roughly 2/3 of Americans participate in plans if offered. This is the preferred method of retirement savings for 2 obvious reasons:
- Tax deferral (taxes aren’t paid until the funds are withdrawn)
- Company benefits (many plans offer benefits like company matching)
Unfortunately, the level of saving in those accounts isn’t always sufficient to meet the future retirement income needs. Below is a table of average 401k balances released by Fidelity:
The amount needed can vary from person to person. It is difficult to know what that total would be without diving in and crunching the numbers. But make no mistake, more and more of the burden for retirement income is falling on the future retiree. Companies simply find it more beneficial and cost effective to push that responsibility down to their employees. So what should you do?
- Save early and often. Starting is often the hardest part of the process. It is so easy to push it off until next month or next year. But the earlier one starts the more time assets have to compound.
- Increase saving rate. If you start early, it is important to ramp up contribution amounts as your income increases.
- Don’t be too conservative. It’s often tempting to accept “safe” investment options with guarantee return rates. However, these are generally long term assets and, thus, time should be your biggest ally. Utilize choices that are consistent with this longer term investing horizon.
- Understand your retirement income needs. This is critical. A retiree that wants to travel the world is going to need significantly more annual income than a retiree that wants to stay close to home and volunteer. Understanding how you will spend your assets in retirement is one of the 3 most important variables in determining needs.
This post is not meant to scare people. It is meant to look honestly at the need to take control of your retirement planning. If you don’t do that you are liable to wake up one morning a few years out from retirement in a panic.
If this all seems like too much to digest, that is normal. This is what we help clients quantify and decipher all the time. Don’t hesitate to contact us if you’d like to discuss your situation and how we can help you make sense of it all.