The Growing Retirement Deficit
For many Americans, the largest single expense in a lifetime will be the purchase of a home. However, retirement costs outstrip the average home costs by more than 250%, according to a new study by Merrill Lynch and Age Wave. Can your nest egg handle that expense?
The study, "Finances in Retirement: New Challenges, New Solutions," addressed the "Seven Life Priorities" of retirement: Health, Family, Work, Leisure, Home, Giving, and the centerpiece of it all — Finances. Average retirement costs are listed as $738,400, a lofty target given current funding trends.
Retirement funding is in transition. Employer-based defined-benefit pensions are giving way to defined contribution plans. The traditional three-legged stool of Social Security, pensions, and personal savings is nearly down to two legs — and one remaining leg is in trouble as life expectancy increases and Social Security obligations build.
As a result, America has a growing retirement savings deficit. The National Institute on Retirement Security estimated the retirement deficit to be between $6.8 and $14 trillion as of 2015.
Younger workers understand the need to take greater responsibility for their own retirement savings. The survey indicates a profound shift in expectations for the balance of government, employer, and personal retirement contributions. The percentage of retirement income from personal contributions is expected to increase from 26% for the "Silent Generation" above age 70 to 65% for the millennial generation, while government contributions drop from 51% to 21%.
Given this information, everyone should be assessing retirement readiness — but too many Americans are unaware of how much money they will need to retire comfortably, and too many who do know aren't on track to meet their goals. Use the free Retirement Planner by MoneyTips to calculate at what age you can retire without jeopardizing your lifestyle.
Don't Be Afraid, Be Educated
According to the Merrill Lynch study, 81% of Americans don't know how much money they will need in retirement. This is reasonably consistent with the Employee Benefit Research Institute (EBRI) 2017 Retirement Confidence survey. Around 39% of workers in the EBRI study reported limited confidence in their retirement savings even though 21% of respondents expected to retire comfortably on $250,000 or less.
Both studies show a gap between thoughts and actions when it comes to retirement savings. Merrill Lynch found a gap of almost 20 percentage points between respondents' expected annual savings for retirement and the average annual US savings rate. In a direct comparison, workers in the EBRI study exhibited a more modest 6% gap in estimates and actual savings.
Both studies also show the need for improved understanding and education about financial issues. Merrill Lynch found that 40% of those age 50 or above do not clearly understand IRAs and 401(k)s and that only 8% of respondents believe personal finances can be discussed openly. Perhaps that explains why 36% of respondents cited personal finance decisions as the ones they second-guessed the most.
The message: ignoring retirement finance issues because they are too frightening or hard to understand will not make them go away. Educate yourself, take a deep breath, and then take a hard look at your own retirement readiness.
Income Vs. Expenses
Start by comparing your retirement goals with the Seven Life Priorities:
- What sort of retirement do you envision?
- Will you be traveling more often to see the world and/or meet with family?
- Do you plan to work part-time?
- Do certain health concerns run in your family?
- Is your lifestyle conducive to good health?
- Do you plan to downsize your home?
- What are your philanthropic plans?
The answers to these and similar questions should help you decide how much of your pre-retirement annual income you will need during retirement. A typical rule of thumb is 70-80% of pre-retirement income, but that assumes few lifestyle changes and good health. A Fidelity study estimated that an average 65-year old retiring couple would require $260,000 in health care costs during retirement, with another $130,000 for long-term care insurance.
With expenses characterized, you can now address income. If you are fortunate enough to have a defined benefit pension, you know how much it will provide. Use the Social Security retirement estimator to get a reasonable estimate of monthly benefits. Evaluate your current 401(k) or IRA and use conservative projections to determine their value at retirement time. The free Retirement Planner by MoneyTips can help you calculate when you can retire comfortably.
If your projected income doesn't cover projected expenses, work backwards to determine how much extra money you need to put away monthly — invested at a given, plausible rate of return — to meet your retirement plans. If debt is an issue, cut expenses to eliminate the debt more rapidly or consider income from other sources. If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.
Are you overwhelmed by the task? Seek professional guidance. Your retirement is too important to leave to guesswork or chance.
It's understandable to be stressed about your future retirement options, especially if you are nearing retirement age. However, the best way to relieve stress is to act on things you can control and avoid dwelling on things beyond your control.
Review your retirement goals and assess whether or not you are on the right path to meet them. If not, make your decision to adjust, either financially or with respect to retirement expectations, and take tangible actions to address any shortfalls. Having taken action, go out and enjoy your life knowing that you have done the best that you can. Excessive worry won't prolong your life or your retirement — it's just going to feel longer.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.