No one wants to work until their dying day. Most of us hope to have enough of a nest egg to spend the last few years of our lives traveling, relaxing, and spending time with people we love—not working and struggling to pay the bills. Sadly, though, a lot of people are in that exact situation.
As it stands, most Americans can’t afford to retire. America’s impending “retirement crisis” has taken over the headlines lately, but it’s an easy thing to ignore. For one, the word “retirement” isn’t exciting. For most of us, retirement seems so far away, we figure we don’t need to worry about it right now. Second, the issue seems to come up every so often (usually when an election is imminent) and then the media and everyone else forget about it.
But that doesn’t mean the problem doesn’t exist, and as time goes on, it’s getting worse. Recent data from the University of California at Berkeley found that the average working American household only has about $ 2,500 in retirement savings. That includes people of all ages, but the outlook for near-retirement households isn’t much better: their average amount saved is only $ 14,500. That’s just not enough to live on for decades after retirement.
The Retirement Crisis In a Nutshell
America’s retirement crisis is a little complex, but it essentially means the entities that have funded retirement in the past are running out of money. What are these entities, exactly? It helps to think of your retirement as a three-legged stool.
The three-legged stool of retirement is a classic metaphor (for financial planners at least), and it basically means there are three things propping up your retirement:
- Employer pension plans: a retirement perk offered by the company you work for
- Social Security: a government benefit paid by taxes
- Personal savings: your own savings, usually investments
Two of those legs, pension plans and Social Security, are failing fast.
A lot of people blame the crisis on a change in how companies handle employer retirement plans. Pension plans are a great perk: your company saves a certain amount of money for your retirement as a benefit, often based on your tenure and salary history with the company. But these are becoming a thing of the past, as fewer companies offer this perk. From 1980 to 2008, the percentage of employees enrolled in any kind of pension plan has fallen from 38 to 20 percent, and that number is expected to continue to decline.
As an alternative, some employers offer a 401(k): a retirement account that allows you to save a certain amount of your paycheck and invest it in the stock market. In other words, it’s a vehicle for your personal savings. Some employers will match a certain amount of your savings, but for the most part, it’s up to you to stash money for your retirement. Plus, you have to learn how to properly invest. Often, many of us don’t bother with either.
Another problem is Social Security benefits are drying up. In fact, the program itself expects funds to be depleted by 2034.
All We’ve Got: Personal Savings
Between that and the decline of pensions, the three-legged stool is down to one leg: personal savings. Ignoring the crisis means neglecting the only leg your retirement has to stand on.
Beyond that, there’s also the fear that our retirement is now solely in the hands of the financial services and investing industry. And after the 2008 financial crisis, it’s easy to be skeptical of that industry. Most of us have to rely on individual investing (whether it’s a 401(k) or IRA) to fund our retirement.
This means we’re at the mercy of funds, the stock market, and brokerage firms. Yes, the market improves over time, but there’s still risk involved, and as anyone who retired around the Great Recession will probably tell you, it’d be better if we had those two other legs to guarantee our retirement a little better.
If all of that isn’t enough of a problem, we’re also living longer. That’s usually a good thing, but it also means you’ll need more money for the rest of your life if you retire at the same age. There are bills to pay, and you’ll probably have medical bills, which can be a huge expense.
In a nutshell, Americans are hugely unprepared for retirement.
How Can We Fix It?
Experts have all sorts of different ideas about what to do, but all three of those legs need to be fixed: social security and both kinds of company-sponsored retirement plans.
Lawmakers in several states (including California, Oregon, and Illinois) are trying to set up state-run retirement accounts for workers. A small percentage of the employee’s paycheck is automatically saved in the state-run individual retirement account (IRA). We’ve told you before that automatic savings can be powerful, and this is a way to get people on board with it. Employees can adjust that percentage (which, in Illinois, for example, starts at 3%), and even opt out of the program if they want to. But these state initiatives make saving for retirement the default, which will encourage people to save. It’s sort of like social security, except it’s not exactly funded by tax dollars, but by an individual paycheck, and the money is invested in stock market funds.
The Social Security problem boils down to this: taxpayers pay into social security, but it funds a different generation’s retirement, and the country is running out of social security money for future generations. That means younger people won’t have access to benefits they’ve already been taxed on. We need reform, but, unfortunately, there’s no easy solution. (The AARP has a neat tool that lets you play lawmaker and try out different solutions, though). The answer comes down to funding Social Security by paying more in taxes or giving out less social security by reducing benefits. It’s a tough compromise, and the fact that one generation pays for the next makes it a little more complicated.
How to Ensure You Have Enough to Retire
Beyond voting for the people and policies you think will help, the only thing you can really do to ensure your retirement is beef up that third leg of the stool: your personal savings. Yes, that means investing: that thing everyone is scared and skeptical of. And it does kind of suck that our entire nest egg is at the mercy of investing, but that’s still better than the alternative: doing nothing and not earning a return on your money.
If retirement is far away for you, that’s good news. You have time on your side, and time makes a huge difference. The more you invest early, the more compound interest will beef that up over time. Even if you can only save a small amount each month, find a way to do it, because that cash can really add up. Even if you have debt, you should try to contribute something. If your employer offers a 401(k), look into enrolling, especially if they offer you a savings match. Don’t have a 401(k)? You can start an Individual Retirement Account (IRA) on your own. Investing isn’t as hard as you probably think it is—you can learn the basics in an afternoon.
Unfortunately, if you’re close to retirement and you don’t have enough saved, you’ll have to play catch up. You may have the option of working longer: in other words, postponing your retirement. Even a few years can make a big difference, not just because of your own savings, but your Social Security will be higher, too. As Charles Ellis, author of Falling Short: the Coming Retirement Crisis and What to Do About It explained over at ThinkAdvisor:
Every year you continue working past 62 gets you 8% more in Social Security payments,” Ellis said. By age 70, that’s equivalent to 76% more in monthly payment than what would be collected at age 62, according to Ellis. “Putting in another 20% of time gets you 76% more in Social Security.”
Plus, that also gives you more time to beef up your savings. You may also consider downsizing your lifestyle at retirement, or look for other ways to generate income once you’ve retired. At the very least, you’ll want to sit down and crunch the numbers. Use the AARP’s retirement calculator to help figure out how much you can get by with at retirement. You can also calculate your social security benefits online.
Whatever your age, you should have a solid retirement plan in place. Even if you’re broke and in debt, think of paying off that debt as part of your plan. As it stands, most of us don’t have enough to stop working one day. It’s an overwhelming problem, and a lot of the answers might seem out of our hands. However, ignoring it only makes things worse. You won’t be able to single-handedly tackle the crisis yourself, but you can address your own situation and do what you can to improve it.