The Retirement Income Crisis

Our country is facing a looming retirement income crisis. What exactly does that mean? Simply put, it means those people retiring from the workforce may not have the money necessary to maintain the standard of living they have become used to during their working years.

On a personal level, that can have a range of implications. For many, it may mean cutting back on luxuries, entertainment, activities, or travel they had hoped for in later years. For others, it may mean adjusting to lower-income living and, perhaps, relying on government assistance.

Why has this crisis come about?

The fundamentals of retirement saving have evolved from the “three-legged stool” model of pensions, personal savings, and Social Security. But Americans, by and large, haven’t adjusted with it.

For instance, competitive and economic developments have prompted many companies to shift from defined-benefit retirement programs, like pensions, to defined-contribution programs, like 401(k) savings programs. But many workers don’t have access or fail to take advantage of such programs. And beyond that, many don’t build personal savings as well. Additionally, they overestimate the support Social Security will provide.

At the same time, the investment landscape has also changed. The market corrections of 2007 and 2008 had negative consequences for retirement plans dependent on equities. The low-interest-rate environment that followed also wasn’t beneficial for most traditional saving strategies. The economic downturn of the COVID-19 pandemic exacerbated the situation by forcing many to tap retirement savings to make up for lost wages or business income.

The combination of changing retirement fundamentals and market conditions means many of those approaching retirement don’t have the resources they planned on.

However, there are opportunities to forestall this crisis, as greater numbers of people take advantage of financial wellness programs, and the financial sector sharpens its focus on product innovations in protected lifetime income solutions. Additionally, the solution will need to shift the retirement planning mindset and financial planning culture from savings and accumulation only, to savings, accumulation, and protected lifetime income.

Retirement savings lacking

Americans, for the most part, have not saved enough for retirement. The exact estimates can vary, but the Government Accountability Office (GAO) in 2017 found that the median retirement savings for Americans between age 55 and 64 was $107,000.1 The Federal Reserve, in its survey of consumer data, said American families had median retirement savings of roughly $65,000. And various surveys by banks and financial institutions put estimates wider still, from as little as $17,000 to upwards of $172,000.2

Regardless of what estimate you consider, they are all far short of what most people need. Generally, financial analysts suggest you need about 75-80 percent of your pre-retirement income coming in to live at the level you are used to. To generate that kind of income, you generally need to have at least 6-8 times your annual salary saved up. So, someone making $75,000 a year would need a nest egg of about $450,000-$600,000, much more than even the most positive estimates above.

What can be done?

Luckily, there are movements underway that could help to alleviate the crisis.

One is that many sectors of society with a stake in this situation — industry, government, academia, and most importantly, consumers themselves – are beginning to understand the need for fundamental changes in the retirement landscape and coming together and building organizations to discuss it.

There is still a long way to go to make the nation’s overall retirement numbers add up. But the growing financial awareness among consumers and efforts by the industry to develop innovative answers are important first steps. The key is keeping the momentum moving forward.


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