The Retirement Crisis
Field Note: August 2019
For decades Americans have relied heavily on social security and employer sponsored pension plans to fund their living expenses in retirement. However, with life expectancy rising, social security’s looming funding shortfall, and the reduction in employer sponsored pension plans, Americans are scrambling to piece together retirement income. For most, retirement savings within defined contribution plans like 401(k) and 403(b) plans, or individual retirement accounts like Traditional and ROTH IRAs, are supposed to serve as a replacement for the old and aging defined benefit programs. As of now, these savings options have proven inadequate. The following data sheds light on the magnitude of this expanding challenge.
Retirement Account Ownership Among Working Age Individuals, 2018
According to the National Institute on Retirement Security, nearly 60% of working age Americans do not have an individual retirement account nor do they participate in a DB Pension Plan through their employer. Of those closer to retirement (ages 55-64), over half are without a retirement account.
Ratio of Retirement Savings to Income among Working Individuals, 2018
Four out of five working individuals have retirement savings less than one times their income, while experts recommend putting away at least 10 times income if retirees wish to maintain their standard of living. Additionally, less than ten percent of working individuals under 55 have retirement savings equal to or greater than their income.
Source: National Institute on Retirement Security
Median Retirement Account Balances among Individuals with Retirement Accounts, 2018
Median retirement account balance for all working individuals is zero. At the close of 2017, there was a recorded $16.9 trillion in US retirement accounts. Individuals in the top income quartile own most of those assets, leaving the majority of workers with little to no retirement savings.
The median account balance for individuals with retirement accounts approaching retirement age (ages 55-64) was $88,000 in 2018. Using the a safe withdrawal rate of 4%, such an account could sustain an income stream of $293.33/month, a far cry from the real income needs of most retirees.
Source: National Institute on Retirement Security
Sources of Income for Americans ages 65 & Older
The New School, SCEPA 2017
Earnings as Percent of Total Income
“Even if Americans are able to work past age 65, these earnings on average make up a small amount of income. The highest share of income from earnings is in New Jersey, with those over 65 receiving an average of 20% of their income from working. However, this is not enough to make up the gap in income from retirement assets. After 65, income from earnings declines rapidly with age, so working longer cannot solve the problem of a failing retirement system.”
Schwartz Center for Economic Policy Analysis, The New School
Pensions and Financial Assets (Retirement Savings, Bonds, Stocks, etc.)
as Percent of Total Income
“To prevent downward mobility in retirement, assets should make up half of retirement income, less income from working. Unfortunately, every state falls short of this goal. The highest average in the country is only 33% in the District of Columbia, while nearly all southern states fall below 20% of income coming from assets.”
Schwartz Center for Economic Policy Analysis, The New School
Social Security as Percent of Total Income
“In most southern states, over 60% of average income comes from social security. Even though some of the wealthiest states (New York, California, Maryland, Massachusetts) depend on Social Security the least, these benefits still comprise more than 50% of retirement income.”
Schwartz Center for Economic Policy Analysis, The New School
The current American approach to retirement savings is not working. By 2034, social security will only be able to deliver ¾ of the benefit it has promised. Our citizenry will need to be more educated on matters of financial planning and investment management than ever before if we are to overcome these shortfalls. If you or your family have questions or would like to discuss how to improve your retirement plan, contact your Skyline advisor.