Retirement is a topic that regularly makes headlines, and not all of them are encouraging. Americans are living longer than ever before. However, if you assume most people are saving more to prepare for their longer-term needs, you’d be mistaken. Here are some of the more startling truths about retirement in the U.S.
- The post-career phase of your life could last a quarter-century or more.
- Social Security benefits alone are not enough to ensure a comfortable retirement.
- Almost half of all Americans have no retirement plan savings whatsoever.
- Medicare will not cover the costs of assisted living or a nursing home.
- To make sure you’re saving enough, try to max out contributions to your employer-sponsored plans and IRAs.
1. It Could Last Longer Than You Think
The average American will retire at age 66 and live until nearly 79. However, for many, retirement will last much longer than 13 years. The numbers are skewed by the number of individuals who die relatively young.
Consider this: A 65-year-old woman has a 50% chance of making it to age 86.5, and a 65-year-old man has a 50% chance of reaching age 84 (as of April 1, 2020). That’s why younger workers need to plan for two decades or more of income in retirement. And for current retirees, an ultra-conservative portfolio composed solely of bonds may not provide enough growth, especially with interest rates still near historic lows.
“While portfolios exclusively or primarily composed of bonds may seem safer than stocks with potentially lower downside risk short term, historically they have provided significantly lower overall returns long term. This can be cause for great concern in regard to keeping up with inflation or meeting desired asset projections for satisfactory income later,” says Daniel P. Schutte, MBA, founder and financial advisor, Schutte Financial, Denver, Colo.
“A broadly diversified retirement portfolio consisting of 40% large-cap U.S. stocks, 25% small-cap U.S. stocks, 25% U.S. bonds, and 10% cash has had a 98% success rate in lasting at least 35 years during retirement before running out of money. Diversification is a lifelong investing guideline—stay diversified in retirement too,” says Craig Israelsen, Ph.D., designer of the 7Twelve Portfolio, of Springville, Utah.
2. Social Security Falls Short
A lot of financial advisors recommend replacing 80% of your usual income once you hit retirement. Most of the time, Social Security payments alone won’t be nearly enough to hit that target.
In 2020, the average monthly Social Security benefit was only $1,503, which comes out to $18,036 per year.
“One of the big issues with Social Security is that it only provides a similar standard of living for those in the lowest quartile of income earners in the U.S. In other words, unless your household is earning less than $30,000 a year, most people will need to rely on some sort of personal savings in order to maintain their current standard of living in retirement,” says Mark Hebner, founder and president of Index Fund Advisors Inc., of Irvine, Calif., and author of "Index Funds: The 12-Step Recovery Program for Active Investors."
3. Americans Are Way Behind on Savings
“Between two stock market crashes and not saving enough in the last 16 years, coupled with increased expenses and inflation, Americans are very far behind on saving for retirement,” says Carlos Dias Jr., founder and managing partner of Dias Wealth LLC in Lake Mary, Fla.
As the American workplace turns away from pension plans, the onus is increasingly on workers to secure their own retirements. The fact is, though, relatively few succeed. A 2019-2020 report by the Federal Reserve SCF data and a report from the Government Accountability Office (GAO) found that the median retirement savings for Americans between age 55 and 64 was $107,000. The GAO notes this sum would only translate into a $310 monthly payment if it was invested in an inflation-protected annuity.
On the plus side, the mean retirement savings of working households age 32 to 61 is $95,776, according to the Economic Policy Institute. And 35% of workers have $100,000 or more saved for retirement.
4. Only Half Have a Retirement Plan
It used to be that you could spend most of your career at one company and count on a pension once you reached retirement. Today, however, the median annual pension amount for the dwindling number of Americans who have the old-fashioned defined-benefit plan is only $9,376, according to CNBC.com.
Unfortunately, many of us aren’t replacing those pensions with a defined-contribution plan such as a 401(k). According to Vanguard’s How America Saves 2019 report, about 100 million people have a defined-contribution plan, including some who also have a pension. The end result: About 33% had no workplace savings vehicle of any kind in 2019.
Still, 79% of workers who have access to a workplace retirement plan are using it to save.
The size of the average 401(k) balance in the fourth quarter of 2019.
5. Many Are Staying in the Workforce
Given the fact that so many Americans are behind in their savings, perhaps it’s not surprising that many remain in the workforce well after reaching Social Security eligibility.
According to Bloomberg, almost 19% of people 65 or older were working either full- or part-time as of 2017. Some 20% of workers overall say they’ll never be able to retire.
6. Medicare Won’t Cover Assisted Living
Government data reveals that nearly 70% of individuals who reach age 65 will need long-term care at some point. The median cost of an assisted living facility was $4,300 a month as of 2020, according to Genworth Financial Inc. It was more than twice that for a private room in a nursing home in 2020.
What many seniors don’t realize is that Medicare doesn’t pay for most long-term care costs. It only covers 100 days of care at a skilled nursing facility, and only if it was preceded by a hospital stay of three days or more.
If you’re not sitting on a sizable nest egg, that’s a good reason to start thinking about long-term care insurance in your late 50s or early 60s.
Now for Some Good News
While it seems that every week a new study or survey is released that emphasizes how woefully unprepared Americans are, other research suggests that the retirement outlook may not be as bleak as it seems—both in Americans' attitudes and in the action they're taking.
Here are some fun facts:
- Six out of 10 workers say they feel confident or somewhat confident about being able to enjoy the kind of retirement they want.
- 57% of workers say saving for retirement is their top financial priority.
- 62% of workers expect their standard of living to stay the same or increase in retirement.
- More than one-third of households owned an individual retirement account (IRA) in 2019.
- Of the households that made contributions to an IRA, 43% contributed to traditional IRAs, while 44% contributed to Roth IRAs, and 13% contributed to more than one type of IRA.
How to Get on Track
Depending on how much progress you’ve made toward your own retirement goals, you may be feeling better or worse about where you stand. If you’re not quite as close to your target as you’d like to be, taking a second look at your retirement plan can help you pinpoint the gaps.
Start by trying to figure out just how much you’ll need for retirement, based on your current spending and the standard of living you want. Then look at your savings balances and how much you’re saving regularly.
Over half of Americans (55%) build their nest eggs using a regular savings account, but that might not be good enough, given the low-interest rates bank accounts offer.
Among millennials, 63% prefer cash to stocks or mutual funds for retirement savings.
You need to look into other investment vehicles. Are you maxing out contributions to your 401(k) or 403(b) if you have one, or, at the very least, saving enough to get the company match? If not, think about increasing your contributions.
If you don’t have a plan through your job, or you’re fortunate enough to max out your plan each year, you can supplement your savings with an IRA. For 2020 and 2021, you can contribute up to $6,000 a year to an IRA, or $7,000 if you’re age 50 or older.
The slow erosion of pension plans means Americans should be turning to defined-contribution plans in order to prepare for retirement.
Alas, as the data show, that’s all too often not the case. Studies and statistics can show if you’re on track—or not—and how to plan accordingly.