The Pending Retirement Savings Crisis

by
Adam Rust

Perhaps the core problem that must be overcome is this: saving isn’t much fun.

The familiar television advertisement, where the person says his retirement goal is “a kazillion dollars,” is all too true. Most people have no idea how much they need for retirement, and frequently, they couldn’t say how much they are likely to have given their current savings trajectory.

Ever since the de facto retirement plan switched from “defined benefit,” where the amount of the pension payout is fixed, to “defined contribution,” where only the amount of the investment is certain, people have been under-contributing to their retirement. We had our foreclosure crisis. The next one may be the crisis of insolvent seniors.

In 2017, the average middle-aged American household had $250,000 in savings. While a quarter of a million dollars is a lot of money, it may not be adequate to support a long retirement. A quarter of a million dollars does not sound like a crisis. It sounds reasonable enough, but only because of how the number is calculated and because of what factors go into the math behind that number. Averaging creates distortions. If you have one person whose has set aside millions for retirement, then that sum alone can make things appear favorable. For example, if three people have no savings and one person has $1.6 million, the average savings is $400,000. Averaging would, in that scenario, convey the notion that workers were making progress.

One-third of workers with a job (not self-employed) have no savings at all. Close to 20 percent of 60-year olds have a net worth of zero or less than zero.

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Why is this happening? First off, many must pay off debt before they can begin to save, and the share of our workforce who must do so continues to increase as the cost of education increases. The Department of Education says that the average borrower graduates from college with approximately $25,000 in student loan debt. A generation ago, most schools charged far less in tuition. At state schools, it might have been possible to pay tuition while working a part-time job. That is not possible – it isn’t uncommon that attending college costs more than $20,000 at a state school. At some private universities, the number soars to $60,000.

As late as 44, more than half of college grads still had student loan debt.  

Living paycheck-to-paycheck translates to a life of hard choices. According to the Federal Reserve, eighteen percent of households put off dental care because they could not afford to pay for it (down from 24 percent in 2013).

More than half of respondents to the Fed’s survey said they if there were to lose their primary source of income, they would not be able to cover their expenses for three months – even if the options include the ability to borrow money. 15.7 percent said that if they had a $400 emergency expense, paying the cost would necessitate that they did not pay other bills.

The Census Bureau reported that median US household net worth was $80,033

For most people, equity in a home constitutes the largest share of their asset holdings. It’s hard to rely on home equity for retirement, short of selling a home or taking out a new mortgage. The alternative – to sell your home, is hardly advantageous. Now – Pulling Back the Veil

The next list outlines the percentage of American households who hold no wealth in a particular asset class:

• Financial assets at a bank: 10.8 percent

• A vehicle: 15.3 percent

• Home equity: 36.8 percent.

• 401 (k): 59.3 percent. Over the last decade, slightly fewer than two of every five adults is not in the workforce. Being in the workforce includes people who are working as well as those who are unemployed but actively seeking work.

• IRA/Keough: 72.6 percent

• Stocks or mutual funds: 80 percent

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