As baby boomers retire, it will put increasingly more strain on the Social Security system it becomes even more important to save for your retirement. While the system is sufficient right now, that may not be the case in the years to come.
But the risks associated with Social Security are not he only troubles facing retirees right now. With the advent of the 401(k) system in 1983 defined plans such as pensions started to disappear from the private sector as a major source of income for retirees. The main issue here is that the 401(k) plan was not intended to replace the pension in its entirety.
Here is where the main issues are for the 401(k) plans as a replacement for pensions in retirement. In 2001, the average household had about $91,000 saved in 401(k) plans and IRA’s. That figure was only $96,000 in 2013 according to a study I recently read. A $5,000 increase in value over 12 years is not a significant advance in our savings or at least one that is large enough to provide us a comfortable retirement later in life. And this study included those Americans who have saved millions which shows that the savings of the average American are even more underfunded.
In the US, today nearly half of all working families have nothing saved in retirement accounts. The median family has around $5,000 saved in their retirement accounts. For people between the ages of 55 and 62, their savings was about $17,000. That is nowhere near enough to fund anyone’s retirement years. However, the top 10% of workers had, at least, $275,000 saved showing that the bottom 50% has nearly nothing in their accounts.
In the past pensions were the great equalizer for retirees with people of modest incomes earning their retirement pension alongside the wealthy. Enter the 401(k) plans and people with lower paying jobs were less likely to be employed in situations that even offer 401(k) as an option. And with the financial risks being shifted to the employee low wage earners are even more likely not to shift a portion of their paycheck to retirement accounts. Also, 401(k) plans are more difficult for average employees to manage when compared to a benefits pension manager handling the details for the employees.
From the same study, I read it seems the lines of 401(k) balances can also be seen along the lines of race and education, not just in wages. While it is true that higher wage earners have more saved than those in lower paying jobs, African Americans and Hispanics have almost no retirement savings and the ones that do have small balances. This bleads over to education as well with most people who did not earn a college degree also not having retirement accounts in their names. And if you did not graduate college about 82% of those individuals have no savings at all.
In years, past retirement was basically a three-legged stool where savings, pensions, and Social Security made up the sources of our retirement years. With people not saving in a 401(k) plan that was intended to supplement pensions one leg of the stool is gone for most Americans. Then companies have been reducing the defined pensions and stating the 401(k) is what is replacing those older benefits. This was never the intention of the 401(k) plan; it was never intended to replace the pension but as I alluded to earlier supplement them. That leaves one leg on the retirement stool, Social Security.
And Social Security was not intended to be someone’s sole source of retirement income either. It was also designed to be a supplement to savings and pensions. But today too many seniors rely solely on Social Security for their living expenses placing a huge burden on a strained system.
The government is trying to open avenue to people in lower paying jobs and offering low-cost savings through the new MyIRA, which is operated similar to the Federal Government’s Thrift Savings Plan but with one investment option which is guaranteed. The returns are not great in this option, but it is a viable one for low wage earners who do not have a work plan established for them. The catch is once the account reached $15,000 it will be converted to an IRA with the hopes that people will continue to make contributions.
Some states are even getting into the act of assisting lower wage earnings with help in saving for retirement as well. Recently California introduced the Secured Choice Plan. It is a statewide portable retirement savings plan for workers who cannot access one through their employer. The state is hoping to be able to pool funds in the hopes that it will keep costs down and maybe even creating a reserve to help protect against losses.
With the passing years and the disappearance of defined pensions, it is even more vital that people save for their retirement. Be that through workforce 401(k) plans, IRA’s or brokerage accounts it is imperative that working Americans save as much as they can for their retirement years. While I think Social Security is going to be there for retirees, it may not look the same in the future as it does today. Making saving even more important than ever.
If you need any help or have any questions feel free to leave a comment or contact me directly.
