In recent weeks, two prestigious financial services organizations, Vanguard and TIAA, published articles decrying Americans’ lack of financial preparedness for retirement. Their conclusions are supported by research from other organizations such as The Schwartz Center for Economic Policy Analysis and the National Institute on Retirement Security. However, there is a counterargument which asserts that most Americans will be just fine in retirement. This should remind us that economic debates are always complex and nuanced.
Let’s begin with a few numbers. Vanguard found that the average balance in the 5 million retirement accounts it administers is $167,970, up 13% from last year. However, the median, which is more representative of the status of most workers, is just $44,115. Based on a typical withdrawal rate, a $44,000 fund would only provide monthly income of $147! As a basis for comparison, various rules of thumb suggest a target at retirement of $600,000 to $800,000 for the family earning median income. Vanguard also reported that 6% of participants made a hardship withdrawal in the past year averaging $1,900. The number of people making hardship withdrawals has increased for six consecutive years adding to the challenge of amassing sufficient retirement assets. The Boston College National Retirement Risk Index shows that 39% of Americans are facing a lower standard of living in retirement. Even worse, Fidelity estimates that 40% may run out of money. And, of course, there are major concerns regarding the future of Social Security.
The first opposing argument is that retirees actually spend less than the amount assumed in most financial models because payroll taxes and retirement contributions end, mortgages are frequently paid off, work-related expenses decline, and spending naturally falls with age. Second, household wealth is broader than retirement accounts. Many families have home equity, taxable investment accounts, inheritances, and income from part-time employment. Finally, people adapt by working longer and reducing discretionary spending.
There is one unfortunate fact on which both sides agree: the retirement crisis is acute in certain groups. Particularly challenged are low-income workers, people with poor health, those with inconsistent work histories, divorced individuals, and those without employer retirement plans. Both Fidelity and Vanguard find that plan participants actually contribute at the recommended level of 12% to 14%, including the employer match. The problem lies with those who do not participate in a retirement plan. Whereas roughly 42% of all workers do not have access to one, that figure rises to 63% for the bottom half of the income distribution and 76% for the lowest decile.
While hardly an expert, I lean toward the crisis point of view. Regardless of where one comes out on the debate, the most important task is identifying and helping those most at risk. For them, retirement security is not an academic discussion-it is a matter of financial dignity and basic quality of life.