In a recent research white paper, Empower Institute asks a simple question: “Are retirement savers really facing a crisis?” Empower argues that the answer to this question is, emphatically, “No”. This contrarian stance is in stark contrast to others that paint a dire picture of the consequences of paltry retirement savings and broken planning strategies. My view of the retirement landscape is somewhere in between. I believe the existing retirement system can work well, but only for those who know which levers to pull, how to pull them and when to pull them.
Globally, the System Appears to be Working …
The Empower Institute white paper makes many points that I believe are valid. The first, and most substantive point in my eyes, is that when talking about retirement planning there needs to be a comprehensive perspective. For example, the paper cites a CNBC article that states the average 401k account value for those aged 65 and higher is $58,035. Clearly, that is not nearly enough to get through even a couple of years in retirement and, taken at face value, it is an alarming statistic that garners headline interest. But consider that the median period of working for an employer is only 4.2 years. How much money do you really expect to be in that account? While some people could choose to roll over their entire retirement account into a company sponsored 401k, many choose to roll those balances into a different account, such as an IRA.
This paper argues that we should look at retirement preparedness through another lens: annual contributions and total retirement assets, as a percent of wages. On this score, things look much better. In 1975, employers & employees were contributing 9.9% of wages and salaries to retirement plans. Today that stands at 12.8% – a significant increase. When you consider just three types of retirement assets – IRAs, Defined contribution plans (401ks, 403bs) and defined benefit pensions – the total retirement assets in 2017 as a % of wages and salaries is 337%, far above just 48% in 1975. Again, a very large jump.
Finally, the definition of retirement assets should be much broader than liquid financial assets held in bank accounts. This report estimates that liquid financial assets represent only 40% of what is available to a senior to tap into during retirement. The largest part of the retirement nest egg, for many people, is the value of their house and social security.
… Just Not for Everybody
From the top down perspective, the entire system appears to be functioning. However, the system is much more oriented towards a “DIY” – do -it-yourself – retirement planning model than in prior generations. In my eyes, this is creating a great disparity in accessing the services & strategies necessary for a successful retirement. “Retirement Progress” – as defined by being on track to replace your current income during retirement – is much higher for those employees that get some assistance (via a financial adviser) in navigating the complex world of financial services. Specifically, individuals that had some access to an investment adviser are on track to replace 91-116% of their current income in retirement vs. only 58% of people who don’t have access to an adviser.
“The Over-Stated Retirement Crisis, September 2019”, Empower Institute.
What is Your Strategy?
I believe that even the most sophisticated business executives get confused on how to navigate their choices. For Seattle residents, how do you weigh the importance of investing in your 401k vs. investing in your home if they are both valid retirement assets? The problem is that there is no right answer for everybody. In fact, the right answer for the same individual will change significantly over time.
I believe any individual can be successful saving for retirement – they just don’t know how.
If you are not sure if you are on track with your objectives, consider giving me a call for a free consultation. I often consult with individuals and small businesses to give them an idea of what they need to do to prepare themselves (and others) for retirement.