Friday, May 17, 2013

Have You Been Listening? Retirement is Broken.

If you aren’t aware that our retirement financing system in this country is broken, then you haven’t been paying attention. People have been shouting it from the rooftops for a long time now.

Google “retirement shortfall” and you’ll find a boatload of articles on the subject beginning a decade ago or even earlier. This shouldn’t come as a surprise to anyone at this late date.

How do we know it’s broken? Because most households will need to save at least $200,000 to maintain their pre-retirement standard of living after leaving the workforce and according to the Employee Benefits Research Institute (EBRI), only about 10% of workers will retire with that much. Almost one-half of Baby Boomers and Gen Xers were determined to be at risk of not having sufficient retirement income to cover even basic expenses and uninsured health care costs.

Lest you think this is a Baby Boomer problem, EBRI studies show that younger “cohorts” are even worse off.

Why haven’t people saved enough?  There are no doubt many reasons, but in general the problem is that out current “system” for retirement funding demands far more from most families than they can possibly save, investing skills that most don’t have, and a whole lot of luck.

Teresa Ghilarducci explained the problems quite well in “Our Ridiculous Approach to Retirement.” Wall Street money manager and former neurologist, William Bernstein put it this way in a Money magazine interview in September 2012:

“I did a little thought experiment in which I calculated how many years it took people starting work in different years to make their number. I realized that the cohort that started working during the worst of economic times is the one that did the best. The last cohort that actually was able to make their number started their careers in 1980, and they made their number in 19 years. And the graph ends in 1980, because no cohort that started work after 1980 actually made the number. “

In February 2011, the Wall Street Journal reported, “the 401(k) generation is beginning to retire, and it isn't a pretty sight.”

And in case you thought Social Security would bail you out, the New York Times ran a story on the prospects of living off the benefits alone.

It isn’t pretty, either.

Our retirement system is in deep trouble. It doesn’t work. And if you are still avoiding the issue, it isn’t because the media have been trying to keep it a secret. As two-time Pulitzer Prize-winning editorial cartoonist and columnist David Horsey recently put it, Time to Wake from the American Dream and Face Retirement Reality.

I’m not trying to scare you. . . well, maybe I am. If you’re still young I hope I scare you into saving every penny you can for retirement. As Bernstein says, “Save as much as you can as early as you can and don’t ever stop.” And who knows, conservative politicians have been trying to undo Social Security since it became law in 1935 and maybe one day they will.

If you’re closer to retirement, then scaring you isn’t going to help. There are things you can do, though.

Read my series, Inadequate Retirement Account (IRA), for ways to make the best of your situation.


  1. Where does the $200k number come from? Just curious.

  2. Excellent question. It comes from a number of sources, but I added a link to one, the Aon Consulting Replacement Rate studies (especially Appendix II).

    I actually picked that number ($200,000) because EBRI studies show that fewer than 10% of workers have saved that much. If you work through the Aon numbers, though, you see that a TYPICAL household with $30,000 pre-retirement income needs to replace 31% of that income from private savings after SS benefits ($9,300 a year).

    If you assume a 4% annual spending rate (difficult to achieve in today's capital environment), the family would need $232,500 of savings to generate $9,300 spending. You can also see that as pre-retirement income increases, savings requirements get much larger.

    William J. Bernstein says you need to save about 22 times the amount of your pre-retierment spending that won't be replaced by Social Security benefits. You can work it out that way, too.

    It also comes from personal experience. I help middle class families who are trying to figure out if $900,000 of savings is enough, or if $2M is.

    I'm sure there are families that will retire with less than $200,000 and maintain their pre-retirement standard of living, but they won't be typical.

    Thanks for the question.