With traditional pensions going by the wayside, uncertainty surrounding future Social Security payouts and people living longer, money managers say securing a solid financial future is in the hands of individuals now more than ever.
According to Vanguard’s annual How America Saves study, the average defined contribution plan, like a 401(k), for people at retirement age of 65 and older had a balance of $192,877 in 2018. And the median, where half had more and half had less, was at $58,035. That only equates to $4,300 a year, if they live until the average life expectancy.
But data show millennials are bucking the trends in retirement savings.
According to a study this year from the Transamerica Center for Retirement Studies, adults today who are 40 years old or younger began saving for retirement at a median age of 24 – and they’re saving roughly 10% of their income. That median age is six years earlier than Generation X began saving for retirement and more than a decade jump on baby boomers.
“Millennials sometimes get a bad rap,” said Justin Setser, vice president and relationship manager with Central Trust Co. “It does appear that many of them have learned a few things from seeing their parents and older generations struggling through the Great Recession.”
Setser said the payoff is coming.
“Time is one of the greatest factors that anyone can have on their side,” he said.
And yet, statistics show not enough people are saving for their retirement. The Federal Reserve Bank of St. Louis last year found only 27% of households nationwide had a defined benefit plan, often a pension, and only 33% had a defined contribution plan. With some households having both plans, the St. Louis Fed estimates about half of Americans have no retirement plan at all. And those who do have a plan simply don’t have enough saved.
“Frequently, people look down the road at retirement and think, ‘I have a long way to go. I’ll wait until I get my student debt paid for or my house paid down,’” said Jill Reynolds, vice president and private client adviser at Commerce Trust Co. “That is very problematic. The best thing is to start as soon as possible.”
According to the Vanguard study, Americans have an average of $92,148 in defined contribution plans, but the median savings is $22,217.
Reynolds said while assets under management are robust and growing among higher net worth individuals, she is concerned about lower-wage workers and their retirement needs.
“In general, we don’t have a lot of high-paying jobs in this area,” she said. “It’s really easy to save enough money when you have a good income. For a lot of our people in this area who have lower wages who are struggling to get their basic needs met, how do they have the extra to put it away for retirement?”
Dean Young, co-founder and partner with Heim, Young & Associates Inc., said too many people live paycheck to paycheck and don’t feel they can afford to save for retirement.
According to the Vanguard study, 51% of individuals earning $15,000-$30,000 participate in a defined contribution plan if it’s made available through their employer, while 94% of individuals earning over $150,000 have such a plan.
“Pay yourself first,” Young said, suggesting starting with 5% of income. “Too many people say … if I have any money left over, I’ll save it. Guess what happens?”
Holly Gray, a fellow partner at Heim, Young & Associates, points to uncertainty with the federal Social Security system.
“People are realizing that their financial success is falling into their own hands,” she said.
Depending on Uncle Sam
The 2019 Transamerica Center study found 26% of people plan for Social Security as the main source of retirement income. In 2018, the average monthly payout was $1,422.
That concerns Reynolds.
“Think of it as a bonus,” she said of Social Security. “It will probably be around in some form at a reduced level.”
Doomsday scenarios surrounding Social Security are not new, but the timetable for cash reserves is shrinking. The Social Security Administration reports cash reserves will be depleted in 15 years. With no change to the program, that would reduce monthly payouts by 20%-25%.
The last time cash reserves were depleted was in the 1980s. As a response, the U.S. Congress voted to increase the full retirement age to 67 from 65.
“It will reach a point of crisis, where the government will have to make a change,” said Derek Schmidly, owner of Auxan Capital Advisors LLC and adjunct professor at Evangel University. “I don’t see them going bankrupt.”
He said Congress could increase the retirement age, reduce payouts or increase the tax base. Every day, 10,000 baby boomers reach retirement age, which is depleting the pool of Social Security funds.
“The percentage of people that are retired compared with the people working is getting smaller,” Schmidly said.
Young said Social Security was never meant to be the only support for people after retirement, and that’s becoming increasingly true as life expectancy increases. According to the Social Security Administration, life expectancy at birth in the 1930s, when Social Security was established, was 58 years for men and 62 years for women. Today, according to the Centers for Disease Control and Prevention, it’s 76 for men and 81 for women.
“Three years after you’re expected to die, we’ll start paying you retirement benefits,” Young said. “It would be like starting the program today and saying, you start paying into this and at age 80 we’ll begin paying you your benefits. People would just laugh at that.”
Young expects a solution before Social Security cash reserves run out in 2034, such as raising the age when people can receive benefits or reducing the benefit amount. But he said legislators aren’t jumping at the chance to address this issue.
“Politicians don’t want to talk about this because baby boomers vote,” he said.
Central Trust’s Setser said it’s clear people need to get serious about retirement.
“A lot of studies have shown that a majority of working age adults are still on track to fall short,” he said. “The trend is no doubt shifting to Americans’ shoulders and saving for themselves.”
He cited the rising cost of health care and higher education and increasing debts as some reasons that may prevent people from saving. He advised parents and students carefully consider the college students attend, their selected majors and how much they take out in student loans.
“I recently helped some friends with some personal financial planning. One was carrying a student loan balance in excess of $300,000,” he said. “Even with a good salary, you can see how this would make it difficult to save for anything.”
Young said the 401(k) plan, which was created in the early 1980s, has been a game changer for Americans. He said, at the least, people should take advantage of employer matches.
“The flexibility over the last 40 years has gotten a lot better for the saver,” he said.
Gray said “catch-up provisions,” which start at age 50, help people make up for lost years of saving. But she said time is the most valuable asset when saving for retirement, so the earlier the better.
“With compounding, that will help build that nest egg,” she said. “You don’t want to scrape by now to have later, but look at increasing your contributions.”
Reynolds points to life expectancies as a key factor. “When we are now living longer and our life expectancies are longer than they’ve ever been, we may stay three decades in retirement,” she said. “Without that regular paycheck, that can be a long time to take care of yourself.”
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