The U.S. Retirement Crisis
There has been increasing chatter lately about a need for reforming 401K’s in lieu of what is undoubtedly going to be a retirement crisis of epic proportions.
Didn’t realize a crisis was looming? Consider this:
– Fewer than half of private sector workers are enrolled in a 401K plan and many don’t even have the option to enroll.
– 75% of those nearing retirement (age 50-64), have less than $30,000 in their retirement accounts.
– 35% of unemployed workers pull money from their retirement accounts and many withdraw early for other reasons. Why wouldn’t they? It’s easy to do.
– Nearly half of 401K accounts are cashed out when workers change jobs.
– 401K’s don’t provide any long-term annuity-like payments that guarantee a retiree will continue receiving income until their death, vs. outliving their balance.
– For those who actually do have a 401K, most of them have no clue on how to manage it properly and are likely not outpacing inflation.
– Pensions, the primary source of retirement income for baby boomer and earlier generations, with their guaranteed payments, are all but dead for gen X and younger.
Most alarming, is the retirement deficit between what Americans have actually saved for retirement and what they should have saved for retirement is already $6.6 trillion! Fail!
401K’s have Largely Failed
Can a renewed focus on 401K’s be the savior of everyone’s financial future?
Ironically, 401K’s were created decades ago as a tax shelter benefit for high income earning employees. They were never intended to become the primary means of sustaining income and life in later years for the entire country. And if that was the intent, consider the experiment a colossal failure.
On a personal level, I’ve maxed out my 401K each of the last 7 years, enjoying a healthy 401K match the whole time. I’m confident I’ll be well-funded in retirement. If used the right way from a high income, high-saver, 401K’s can be great financial tools to cover the majority of your retirement expenses.
But clearly, the majority of Americans have not bought in to the self-directed nature of 401K’s. And I’m concerned. There are only so many Wal-Mart greeter jobs out there, after all.
And what happens when you have tens/hundreds of millions of seniors, unable to find or keep a job, with little to show for all of their years of hard work?
I’m envisioning nothing short of a zombie apocalypse of seniors roaming the streets in 30 years, looking to eat the brains of young children for precious vitamin-rich life sustenance because their 401K didn’t cover their Medicare gap on prescription meds.
Fixing the Retirement Deficit
Big problem. How do you fix it?
It’s clear that:
- Social Security needs to be fixed and fully funded for generations to come – or there will be even bigger problems.
- 401K’s and IRA’s need to stick around with enrollment, contributions, and matches being further encouraged.
- #1 and #2 are not enough.
So what else can be done?
There has been talk about a new guaranteed retirement account that would provide a guaranteed annuity-style defined benefit, funded by individuals and employers – to help supplement Social Security.
I, for one, would welcome such a development, if it were structured in such a way to outpace inflation and it were 100% self-sufficient and supported by employees and employers vs. creating any additional government debt burdens.
Would I need it? Probably not. Would it be an added layer of security? Definitely. For many others? It might be a necessity.
“Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.”
Yeah, sounds pretty ridiculous when you state it that way, Professor G.
Do we just rely on those hundreds of millions of future retirees out there to figure it out on their own? If we do, and they don’t figure it out, we all end up paying for their poverty, one way or another. Or… zombie apocalypse.
Retirement Crisis Discussion:
- Are you in favor of an annuity-style guaranteed retirement account? Why or why not?
- Would you want a guaranteed retirement account to be government run?
- If you are in favor, how would you structure it?
- If you are not in favor, how do you fix the looming retirement crisis, outside of suggesting everyone work until they die?