Make Sure the Retirement Crisis Doesn't Happen to You

Why Boomers Won't Retire

In 2013, the average retirement age was just under 65, while the average life expectancy was more than 85. That means people need to have enough saved to last 20 years. Unfortunately, less than half will not have enough to maintain their standard of living, according to a recent report by the Boston College Center for Retirement Research. 

One reason is that only 17% of companies offer pension plans, compared to 62% in 1983. Instead, most (71%) offer 401(k) plans. That forces employees to acquire a whole new set of skills. They must become their own financial planners, stock pickers, and economic forecasters. 

The 2008 financial crisis only made things worse, as nearly everyone saw their net worth plummet along with the stock market and housing prices. When the Fed lowered interest rates, it meant savers would get a much lower return on fixed income investments. At the same time, many were fearful to go back into stocks. (Source: "The Retirement Crisis Illustrated," Boston College Magazine, Spring 2015)

Here are some of the causes of this retirement crisis, some effects, and what you can do about it so you don't become one of these statistics.

1/3 of Americans Have $1,000 (or Less) Saved for Retirement

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Do you have a retirement plan? If not, you're not alone. More than half (56%) of all workers don't know how much they'll need to save for retirement. Perhaps that's why 36% of workers and current retirees have $1,000 or less in savings. 

Fortunately, you can avoid the fate of most Americans. First, do you know how much net worth do you need to retire? Plan on 10x your final working year's annual salary. Second, don't take money out of your plan, even in a downturn. Third, contribute more than the 3% minimum...and save outside the plan as well. Fourth, use a Roth IRA instead of a regular IRA.

Before you can save for retirement, you must get out of credit card debtor's prison. It sounds so simple: don't buy things unless you really need them, don't replace items until they need it, go to community college instead of higher priced ones. But, 35 million Americans only pay the minimum every month on their bill, which means they pay the maximum on their interest. 

Don't fall for the argument that Americans must get out and spend to spur economic growth. Even after 9/11, President Bush suggested it was a patriotic duty to spend. Nearly 70% of GDP is based on consumer spending. However, economic health should be measured by the net worth of families. It is Americans' wealth, not spending, that will best contribute to a healthy economy in the long run. And that wealth is what is necessary to allow plans for retirement to be successful.

Nearly Half of All Workers Were Forced Into Early Retirement

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Many people just assume that, if they don't have enough to retire, they will just keep working. Unfortunately, 47% of current retirees were forced into an unplanned retirement because of layoffs, taking care of sick parents or spouses, or their own illnesses. Retirement planning is crucial to avoid this fate.

The Employee Benefit Research Institute found that nearly half (47%) of current retirees were forced into early retirement. Half of them had to quit because of health problems or disabilities (55%). Another 23% had to take care of their spouse or other family members.

In fact, healthcare is the second largest expense in most retirees' budgets. Furthermore, a whopping 12 million older Americans will need long-term care by 2020. Most people don't realize this expense is not covered by Medicare.

Surprisingly, only 20% were forced into retirement due to changes at their companies, such as downsizing or closure. You'd think that would be the main reason, thanks to the financial crisis. However, it's possible that many people claimed disabilities to receive benefits that would supplement their income.

This is up significantly from 2007 when only 37% of workers were forced into retirement. At that time, 28% couldn't work because of health problems, downsizing (28%), caring for a family member (25%) or were told they had obsolete skills.

Only 7% of retirees were able to retire early because of good planning. Of these, nearly a third did so because they were able to afford an earlier retirement, while roughly 1 in 5 simply wanted to do something else.

Early retirement is a big shock to most workers since 73% don't plan to retire until age 65 or later. That's is not because they love their jobs so much, but instead really don't see that they have a choice. According to EBRI, these workers are not confident about their financial security, are less likely to have pensions, and are women. (Source: EBRI 2013 Retirement Confidence Survey)

Men and Women Are Both Working Longer Into Retirement

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More and more women between 55-64 keep working, delaying retirement. Above age 65, both genders are working more than in the past. You've probably noticed that older grocery store clerks are replacing teenagers.

The Bureau of Labor Statistics forecasts that, by 2022, the number of workers over 55 will grow to 25% of the labor force, up from the 15% it was in 2006. These workers will be in service sector jobs, where most of the job growth will occur. Many of these service sector jobs, such as grocery clerks, waitresses, and substitute teachers, that were previously held by young people will be held by the post-retirement age worker. (Source: BLS 2004-14 Labor Market Projections)

But Older Workers Won't Retire

BLS reported that, rather than retiring outright, over one-half of older workers are continuing to work in “bridge” jobs. These jobs are being taken by those without pensions, and those who are either lower income or much higher income. Those at the lower ends are taking bridge jobs because they can’t afford to retire, and those at the upper end because they want to explore career options that are of more interest to them.

A 2009 Prudential survey revealed that over half of those age 45-75 are behind in their retirement planning. The survey only polled those with assets of at least $100,000. Most of that wealth was in home equity, which still hasn't returned to 2006 levels for most areas of the country.

The survey leaves out those with a net worth less than $100,000 - folks without enough to retire. The economy is shifting towards freelance and contract work - jobs which don't provide benefits. Even though 62% of those surveyed believe they will recoup their losses, changing economic conditions means it is more likely they won't.

Those at the lower end can’t afford to retire because Social Security is facing shortages, meaning lower benefits especially for those who retire earlier.

Companies are offering 401(k)s instead of pensions, increasing the risk for workers. The risk is because many workers don’t contribute to their 401(k) plans and those that do don’t understand the risk inherent in the stock market. They may find that their investments have disappeared if the market takes a significant downturn when they are ready to retire.

In addition, private savings are at their lowest levels since the Great Depression. After the stock downturn in 2000, many people who were burned by the stock market put their money into their homes. Many Boomers lost their retirement savings and their homes during the 2008 financial crisis. Those who lost their jobs as well had no choice but to take whatever they could to survive. 

The BLS predicts that, as this trend continues, “traditional retirements will be the exception rather than the rule."

Why You Are Working Harder but Feel Like You Are Earning Less

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A large part of increased productivity is because the Internet and other technology solutions allow workers to produce more with the same amount of effort. The U.S. labor force must increase production faster than their incomes rise to stay competitive with foreign workers. This leads to a lower standard of living in the U.S. in the long term as wages equalize.

Income Inequality Has Gotten Worse

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One-quarter of American workers make less than $10 per hour, which creates an income below the poverty line. Meanwhile, the top 1% of workers earned more in income than the bottom 40% of workers. This was in 2005 when the economy was still booming. Now that the economy isn't doing so well, the bottom 40% is really feeling it. How can Americans plan for retirement when there is such income inequality?

A shocking 80% of Americans cannot afford to retire at all. One reason is the CEO pay is now 208 times that of the average worker. This has increased since 1980. That's when CEO pay was "only" 42 times the average worker. In other words, income inequality has gotten worse. Between 2000 and 2006, average wages remained flat despite an increase in worker productivity of 15%, while corporate profits increased 13% per year.

A second reason is, during the housing boom, Americans used their home as an ATM, using home equity to purchase cars and furniture. Now that the boom is over, half of all Americans are under some kind of mortgage stress. In addition, the real estate "boom and bust" also destroyed many jobs - half of the jobs created between 2000 and 2005 were real estate related.

A third reason is that most workers are now reliant on 401(k)'s instead of pensions for their retirements. In 1974, 44% of workers had a pension plan. By 2004, only 17% had one. Most workers don't put enough into their 401(k). Businesses spend a lot of time explaining the different types of funds, but don't actually help workers determine how much they need to contribute to reach their retirement goal. Furthermore, businesses don't contribute as much as those in other countries do.

Four Steps to Avoid Being Forced Into an Unplanned Retirement

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Most people put off retirement planning. They assume it will take too much time and energy. Others are worried that it will just be too depressing, and in fact prove that they'll never be able to retire. Then there are others who don't even know how to get started.

Even without putting pencil to paper, you can safeguard yourself against the four main reasons that people retire early:

  1. Health - Safeguard your health.
  2. Caring for others - Look into long-term care insurance for them. (See LongTerm Care Insurance)
  3. Downsizing - Look into your own career planning. (See How to Survive a Layoff)
  4. Obsolete skills - Make sure your skills are up-to-date. (See How to Acquire New Skills)

6 Steps to Creating a Retirement Plan

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 Here's how to quickly create a retirement plan. In fact, why not set some time aside this weekend. Just follow these simple 6 steps.

  1. Figure out how much you need in income after retirement. If you really don't know, just use 80% of your current income.
  2. Pull out your most recent Social Security statement, or go to My Social Security and find out how much you'll get from the Federal government.
  3. Subtract your annual Social Security benefit from the income you'll need in retirement.
  4. Take what's left and divide it by .04. That's how much you need to have saved up before you can retire. That's because most experts say you should only draw out 4% of your nest egg each year. That's the best way to not run out of money.
  5. Now that you have your goal, look for more ways to save. Over time, you will be able to save more and more. A good goal is 10% of your gross income.
  6. Talk to a financial planner to set up a well-diversified portfolio to protect your nest egg.

Americans spend more time choosing a restaurant or flat-screen TV than planning for retirement, according to a recent survey by financial services provider TIAA-CREF. Don't be that guy. Take the time for these six steps and plan for your retirement.

How Congress Is Trying to Help

In May 2019, the House of Representatives passed a bill designed to make retirement planning easier. It encourages 401(k) plans to offer annuities. These insurance products convert savings into a monthly cash flow. It allows workers to contribute to IRAs beyond age 70 1/2. Workers can also wait until 72 to begin withdrawing IRA funds. 

Employers can offer 401(k) plans to part-time workers. All 401(k) statements must estimate how much monthly income the savings could generate after retirement. 

Parents can withdraw up to $10,000 from 529 plans to repay student loans. Parents can also withdraw $5,000 without penalty to cover birth or adoption expenses.