Pursuing a Secure Retirement in the 21st Century

Have you heard the phrase “not your grandparents’ (or parents’) retirement”? It’s often used by industry professionals and the media when describing how today’s workers envision their golden years. Gone are the rocking chairs, replaced with a more active lifestyle that may include second careers, delayed retirements, philanthropy, and other endeavors. But this phrase also accurately reflects the current state of retirement planning.

Retirement Confidence: Then and Now

Generations ago, the American dream consisted in part of working for the same employer for 30+ years and then retiring at age 65 with a comfortable pension that provided a stream of income for life. Combined with Social Security, these pension payments gave many retirees the confidence that they would be able to maintain their standard of living.

However, over the past 30 years, the landscape has shifted, leaving many people worried about their financial security and the possibility of outliving their savings in retirement. According to a 2017 survey from The National Institute on Retirement Security, 76% of Americans surveyed are concerned about their ability to achieve a secure retirement. And 88% believe the nation is facing a retirement crisis.  

What’s to blame for this more pessimistic outlook?  Several factors, including:

• The phase out of defined benefit plans. Originally intended to supplement pension plans, 401(k)s have become the retirement plan of choice for most employers, causing many to phase out or freeze existing defined benefit plans. As a result, individuals are now tasked with building an investment portfolio designed to help them pursue their retirement goals, and many feel ill-prepared to meet this challenge due to a lack of time, knowledge, or resources.
• Lack of access. Many individuals do not have access to a workplace retirement plan, either because they’re seasonal, part-time, or self-employed workers, or their employer simply doesn’t offer one.
•  Uncertainty around Social Security. In the not too distant future, the Social Security Administration may start paying out more in benefits than it receives in revenues. Social Security has no true trust fund where surplus assets are invested to cover the shortfall; rather the government has spent all surplus revenues from the system. On top of that, the cost of living increases in Social Security payments for current retirees have been small to non-existent over the past few years. So people have been forced to lower their expectations as to how much they’ll be able to rely on Social Security to supplement their retirement income. 
• Increasing healthcare costs and longer life expectancies. It’s possible today’s retirees may need to make their savings last 30 years or longer. And some couples may need $200,000 or more for medical expenses alone, according to the Employee Benefit Research Institute.
• Competing financial priorities. Many people understand the importance of saving for retirement, but monthly bills and other financial obligations (e.g., student loans) often hamper their efforts.  

Savings Snapshot

The impact of these obstacles is most evident when looking at retirement savings trends for 2017, which seem to indicate a large percentage of Americans may be falling behind.

FIGURE 1: 2017 RETIREMENT SAVINGS TRENDS.

Sources: RothIRA.com, "What are the Retirement Statistics," August 17, 2017, and Bureau of Labor Statistics’ National Compensation Survey for 2017.

Closing the Gap with Retirement Accounts

As mentioned above, 55% of Americans are saving for retirement using traditional bank savings accounts. And while using a savings account is better than not saving at all, it shouldn’t be the only option or the primary one because it could actually cost you money. Over time, inflation may erode the purchasing power of your savings and your net return may be lower than you think. Consider this, bank savings account interest rates currently range from less than 1% to 1.8%; inflation is running near 2%.

A more effective option may be to participate in your employer’s 401(k) or other retirement plan and/or contribute to an IRA. Through these vehicles, you usually have access to a broad range of investment choices that could potentially help your savings grow and outpace inflation. But more than that, retirement accounts can offer:

• Potential tax benefits.  Depending on the type of retirement account, you may be able to make pretax or tax-deductible contributions, receive tax-free distributions, or have any investment earnings grow tax deferred. All of which could possibly lower your tax bill now or in retirement.
• Possible employer contributions. Most workplace retirement plans include some type of employer contribution that may help your account grow faster. For example, many 401(k)s offer a matching contribution, such as $0.50 for every $1.00 contributed up to 6% of pay. It’s almost like “free” money so you many want to consider selecting a contribution rate high enough to receive the full match. Keep in mind every employer is different and the actual amount they decide to contribute, if any, will vary.
• Earmarked savings. 401(k)s, other workplace retirement plans, and IRAs have set rules for when and how you can access your money. They’re intentionally designed this way to help ensure the money is used for its intended purpose—your retirement—unlike a savings account, which can generally be accessed at any time and for anything.
• Compounded interest. Because you can typically invest in a variety of asset classes, like stocks and bonds, whose returns historically have often outpaced inflation, you can potentially grow a much larger nest egg than you could in a traditional savings account. And the earlier you start investing, the greater the opportunity. Of course, the potential for greater returns comes with a greater chance for losses. Watch this video to learn more. 

FIGURE 2: RETIREMENT INCOME CALCULATOR

Source: tdameritrade.com

Turning Crisis into Confidence

Ultimately, while it’s true today’s workers may face different and potentially bigger challenges than past generations, armed with knowledge and a financial plan that aligns with their goals, many should be able to enter retirement with a certain level of confidence.

And there’s no better time to get started than National Retirement Planning week, April 9 -13. We’ll be right there with you offering resources, such as the Retirement Income Calculator, and insights to help you stay on track.