The United States is facing a retirement crisis, as many of today’s workers will lack the resources necessary to retire at a traditional age and maintain their standard of living.
This time on Financial Sense's Lifetime Income Series, we spoke with Alicia Munnell, Professor of Management Science at Boston College, to discuss her must-read book Falling Short: The Coming Retirement Crisis and What to do About It.
Three Options Moving Forward
Munnell describes three big approaches in her book: We can accept a lower standard of living, save more while we’re working, or work for a longer period of time.
It’s possible to move from an area with a high cost of living to someplace more economical, she noted, adding that she’s a big fan of people electing to work later in their lives to help extend retirement savings.
For those already facing a retirement shortfall though, there are other options. One attractive approach that many people eschew is tapping into home equity.
“Tapping the home, which is something people have traditionally been reluctant to do, is going to become an absolute necessity,” Munnell said. “We need to set up arrangements to make it easy.”
Another option many people often ignore is purchasing annuities.
“Annuities are an answer, but for a whole variety of reasons, including costs and other reasons, they’re just not very popular in the United States,” Munnell said.
Americans Just Not Saving Enough
Munnell has found that many people will not have enough assets to cover expenses in retirement. It used to be that defined benefit plans covered by employers would provide for workers in their retirement years, but that reality has now almost completely changed.
Instead of receiving an income for life, most workers have been shifted onto 401k plans where they have to build up their own assets and manage it themselves when they stop working.
Also, we’re in the process of increasing the retirement age under Social Security from 65 to 67.
We also see rapidly rising Medicare costs. There are a lot of factors that mean the net amount people are going to receive from Social Security will be much less relevant than it used to be, Munnell stated.
“On the supply side of income, we’re seeing less going to the individual, whereas on the demand side, people need more because they’re living longer,” Munnell said. “We’re in a very low-interest-rate environment where whatever money you have doesn’t get you very much unless you take a risk. We have this mismatch between the decline in retirement income and an increase in retirement needs.”
Voluntary 401Ks Aren’t Working
The average US worker’s 401K is underfunded. The typical saver in the US has about $111,000 in their 401K. This is wholly inadequate.
The good news is, public opinion is changing, Munnell stated. At the turn of this century, there was a lot of skepticism that this was a serious problem. Now, it’s being recognized for the issue it is.
With life expectancies rising and healthcare costs skyrocketing, the shortfall in 401Ks will be magnified by ballooning costs. Munnell likes to consider life expectancy increases from 65 rather than overall life expectancy, and what she’s found is that it has gone from 12 to 20 years, meaning that after the age of 65, most people will live to be around 85.
“Those are big increases in life expectancy, and a long period over which people have to support themselves,” she said. “Your pile needs to be bigger, and the mechanisms by which people build up their piles have automatically got weaker. So there’s more of chance people will have an inadequate amount today than they would have had in the past.”