Do We Really Have A Retirement Crisis In America?

June 05, 2018

Since my early days in the financial services industry, around 1997 or so, the industry mantra has always been, “Save more money for retirement; you never know how long it may last.” I’m not sure if we were talking more about time or money, but most people assume the money won’t last as long as retirement might, which is a scary thought.

The idea that we aren’t saving enough conjures up a pervasive image of an elderly grandma eating cat food because she is now unable to afford groceries in retirement. This thought always bothered me some, though not so much from the imagery as the skewed economic priorities. Have you seen the price of canned cat food lately? From what I’ve seen, it’s actually less expensive to buy whole chicken than some of the premium brands out there.

At least we can now put to rest that image of grandma eating cat food because she went broke. Unless grandma is also housing and feeding 20 or 30 felines, in which case her retirement savings are taking a severe beating.

Are we actually saving enough though?

This story is more about grandma than her cats, however, so let’s get back to her. How much has the average grandma (or grandpa) been saving towards retirement? According to a recent article, many workers contribute sporadically to their 401(k)s and similar retirement plans at work, only to see their savings eroded by subpar returns and high administrative expenses.

Other sources suggest that workers in their 40’s have saved only around $14,000 or so in their 401(k) plans, and the middle 40% of wage earners have socked away only $60,000 or so for retirement. Our own Financial Finesse 2015 research report on Retirement Preparedness shows that just 19% of workers surveyed believe they are on track with their retirement savings.

When the wolf says the sky is falling

Most of us are probably familiar with the children’s stories of Chicken Little and the Boy Who Cried Wolf. I can’t help but think about these tales when I see all the doom and gloom reporting about retirement savings in the media and from the lips of some of my financial industry colleagues.

Of course, creating a crisis mentality can be a good way to sell investments and annuities. Who wants to end up in poverty when there was something we could do about it, if we only acted now, you know, before it’s too late; before rates go up, or down, or Congress does this or that, or blah, blah, blah.

Think about who you know

Despite hearing the cries that we aren’t saving enough and will end up retiring in poverty, how many people do you know that ended up in that situation? As a practicing middle-market financial planner for the past 20+ years, I’ve seen this happen to exactly – zero people. I’m sure there are exceptions out there. There are certainly people who ended up working longer than they originally intended or scaled back their retirement expectations for various reasons. But by and large, Americans seem to find a way to make do, even when their retirement reality doesn’t turn out quite as they imagined it might.

It’s not just rich people I’m talking about

And no, I haven’t been working exclusively with high net worth clients. I’ve also started taking a very close look at exactly who is sounding the alarm about a so-called retirement savings crisis. Often the message comes from someone connected with the financial industry and with a vested interest in the sale of investment and insurance products. Politicians also get in on the message by proclaiming how the private sector has failed and how Social Security and similar programs must be expanded to save people (i.e., voters) from certain doom.

The real cost of retirement

Not the kind to take many things at face value, I began a search for some unbiased (or less-than-biased) information that might suggest exactly how Americans do spend their retirement savings. Perhaps the most telling story comes from a longitudinal study performed by the Employee Benefits Research Institute (EBRI). Following a group of households for several years, this study showed that median household spending actually dropped by as much as 12.5% in the first four years of retirement, and by the sixth year a majority of households were spending less than 80% of what they spent during their working years. (Note that these retirees were living on less than 80% of preretirement spending, not 80% of preretirement earnings.)

Other studies have confirmed this finding, like this one and this one. Most interesting to me were discoveries regarding just how frugal retirees tend to be when it comes to spending down their retirement savings:

People who had accumulated less than $200,000 in non-housing assets at retirement had spent only about 25% of their savings, on average, during the first 18 years of retirement.
Those with assets between $200,000 and $500,000 generally had spent around 27.2% by year 18 of retirement.
Wealthier retirees with nest eggs in excess of $500,000 had spent less than 12% of their savings by the 20^th year in retirement.
Even though some retirees had spent down their savings significantly in the first 18 years of retirement, almost one-third of retirees in the study actually grew their assets during that period. Those with access to pensions were much more likely to fall into this group.

The most important question is: are you saving enough?

The most important question is not so much are Americans saving enough but are you saving enough to fund your retirement? Even though there is substantial research out there suggesting that our retirement years are likely to be more affordable than we might fear, we don’t want to become lulled by false hope and fall behind in our savings efforts. The fact remains that the majority of people we work with don’t think they are on track, and the only way to get there is to save.

At the very least, contributing to one’s retirement plan at work at whatever rate the employer will fully match is a powerful move. Why leave free money on the table, right?

Beyond that, saving at a higher contribution rate may be needed in order to replace 70% – 80% or so of your preretirement income. You can use our retirement estimator calculator or a similar online calculator to measure your progress. If you are able to replace 80% of your income, then the odds are very good that you will have little trouble replacing at least 80% of your pre-retirement spending, which appears to be the true cost of your future retirement.