Six in ten people feel confident in their retirement planning. They believe that they will have the financial ability live comfortably after they are finished working, this according to the Employee Benefit Research Institute’s 2017 Retirement Confidence Survey (RCS). So 40 percent of those surveyed believe they are not confident about their retirement plans, the other 60 percent — rightly or wrongly — think they are on a path to a financially healthy, happy retirement.
Retirement Planning at Work
Back in the 1970’s and 80’s most people had their retirement funded by their employer. The traditional defined benefit pension plan which pays a lifetime annuity, often based on years of service and final salary, has been steadily declining. In 1980 six out of every ten employees in the private sector was getting their retirement paid for by their employer. Two years earlier, in 1978, the U.S. Congress first set up 401(k)’s — private, tax-favored savings vehicles intended to supplement traditional pensions.
Times have changed, fewer people are eligible for such a pension at work. Today, very few people — outside of government employees — have their retirement paid for by their employer.
For most of us, retirement planning is now firmly our own responsibility. The only assistance most us get from our employers is through a matching fund on our 401(k) plans. Not all employers match a portion of your contributions, so essentially your retirement planning is really all on you.
Those who have a retirement plan at work, or those who have a spouse with such a plan, are far more likely to be planning for retirement than those without such a plan. Having a plan at work appears to be a key factor in getting people to save for retirement.
Americans are Lousy Savers
For the most part, we Americans are lousy savers. The chart above shows the historical results. Back in the 50’s, 60’s, 70’s, and even into the 80’s, Americans were saving more than 10%. Since then that savings rate is down in the 4% and 5% range. We have become lousy savers compared to our own history, we are also lousy savers compared to other countries.
In 2015, the most recent data available, many northern Europeans were saving between 9% to almost 14%. Americans are way don on the list.
Americans were never great savers, and over the past three decades, they have become poor savers, ending up near the bottom of the list of countries noted above.
A retirement plan at work helps
Roughly six out of every ten people — 61 percent — indicated that they or their spouse have access to an employer sponsored retirement account — like a 401(k) — where they work.
Nearly all of those people indicated that they are saving at least some money in those retirement accounts. If you have access to a retirement plan at work, you are more likely to save for retirement than someone who doesn’t have access to such an account where they work. There is a startling different between those who save and those who don’t when you overlay the ability to save at work.
Retirement plan at work:
Yes: 80% save for retirement
No: 11% save for retirement
Workers who have a retirement plan at work are significantly more likely than those who do not have such a plan to save for retirement. Roughly 80 percent of those who have access to a retirement plan where they work indicated that they participate in the plan, and consequently are saving for retirement. Conversely of those who indicated that they don’t have access to a retirement plan at work, only 11 percent stated that they are saving for retirement.
Why aren’t people saving for retirement?
For those who do have access to a plan where they work, the reasons for not participating are likely age related. Most young people believe that retirement is too far in the future for them to think about.
This is unfortunate as those young people have the key ingredient in investing: time. The more time you have, the greater the chances are that your money will grow. Some who invests $5,000 a year starting at 35 will have over $500,000 when they reach their 65th birthday, some thirty years later. (Assuming a 7 percent return on their money.)
Someone who starts earlier, say at age 25, who invests that same $5,000 a year, but for 40 years (instead of 30 years) will have in excess of $1,000,000. Sure they invested an extra $60,000, but the real reason they would end up with twice as much money is because of the magic of compounding.
What about those without plans at work
Those folks — roughly 40 percent of Americans — who don’t have access to a retirement savings plan at work appear to be in a difficult situation. We already know that most of us are lousy savers, we are also lazy.
If you have access to a retirement plan at work, it’s incredibly easy to plan and save for retirement. In fact, once you sign up to participate in your company’s 401(k) plan, there’s little else you need to do. All you have to do is indicate what percentage of your gross salary you would like to have withheld from your paycheck and invested in your retirement account on your behalf and then make your investment selections.
Participation is easy
Making your fund selections can be quite simple. Ideally you would be investing your money in broad-based index mutual funds, if your are fortunate enough to have those as options in your plan at work. That’s it, you’r done. There’s nothing else to do. Each time you get paid, a portion — the percentage that you indicated when you joined the plan — gets withheld from your wages and is invested on your behalf. There’s nothing else that you need to do.
If you don’t have a 401(k) plan where you work, you will need to invest on your own. That means that you will need to move money from your checking account into an investment account and make your investment selections. You will have to do this each and every time you get paid.
You might be fortunate enough to have an employer who will allow you to divide your net pay to two financial institutions thereby allowing you to invest more easily, but that’s not all that common.
We are lazy. Needing to make this investment into our retirement account on our own is difficult. Granted, it could be as simple as moving money from one account to another, but few among us have the discipline to do this every time we get paid.
The racial wealth gap
Much has been said about the racial wealth gap and how the financial crisis widened that disparity, especially as minorities have had a harder time keeping their homes and rebuilding their portfolios. But there’s another side to those challenges that doesn’t get as much attention — the retirement savings gap.
White families are far more likely to be participating in a retirement account, and consequently they had over $100,000 more in average retirement savings in 2013 than African American and Hispanic families, according to an analysis done by the Urban Institute, which released a series of charts illustrating wealth inequality in America.
This difference has increased dramatically in recent decades. Since 1989, the gap has quadrupled. In 1989, white families had $25,000 more in average retirement savings than minorities.
The education wage gap
A college degree almost guarantees higher wages. Having higher wages usually means having more disposable income. Those who have more have the greater opportunity to save more.
Only families with at least some college experience are more likely than not to have retirement account savings. But even among families with retirement account savings, there are large differences in account holdings by education.
The typical family with retirement savings headed by someone with a college degree or more education had more than three times as much ($95,000) as the typical family headed by someone with no more than a high school diploma or GED ($30,000), which in turn had twice as much as the typical family headed by someone without a high school diploma or GED ($14,700) in 2013.
Simply having a college degree likely means that you will have more money than someone without a degree, but your college major also plays a key role in how much money you are likely to early.
Those with degrees in STEM programs — Science Technology Engineering and Math — are more likely to earn higher salaries than most others. People who graduate with degrees in subjects like petroleum engineering and pharmaceutical sciences earn $3.4 million more in their lifetimes than those who get degrees in low-paying fields like early childhood education, studio art and social work; over a 40-year career, that’s an average of $85,000 per year difference!
Retirement planning: 24% have less than $1,000 in savings
Having access to a 401(k) plan at work doesn’t automatically mean that people are saving and doing the appropriate retirement planning. While it’s easy to participate — simply indicate the percentage of your paycheck you would like to have withheld and invested on your behalf — people aren’t necessarily investing. And if they are investing, perhaps they aren’t investing enough.
A sizable percentage of workers say they have no or very little money in savings and investments. Among workers providing information to the RCS, 47 percent report that the total value of their household’s savings and investments, excluding the value of their primary home is less than $25,000. This includes 24 percent who indicated that they have less than $1,000 in savings.
Perhaps not surprising, those people who have access to a retirement plan at work have more money in savings. Who has less than $1,000 in savings? Those without easy access to a savings plan. Roughly two-thirds of workers without a retirement plan report having less than $1,000 in savings and investments, compared with just 9% among workers with a retirement plan.
401(k) accounts magnify inequality
Despite rules intended to ensure that high-income families do not disproportionately benefit from tax subsidies for retirement saving, our savings-based retirement system does not simply reflect, but it also magnifies, inequality.
The bottom 60 percent of working-age families receive just 17 percent of the total income. At the same time, these lower paid families also hold just 7 percent of retirement account balances.
Conversely, the top 20 percent of working-age families receive 63 percent of income and hold 74 percent of retirement account balances (numbers in chart may not add up to totals due to rounding).
Essentially, and not at all surprisingly, the more money you earn throughout your life, the better off you are. However those who earn modest salaries can retire with enough money, it just takes discipline. If you are willing to live on less money than you earn, save and invest as much as you can, you can have a financially secure retirement.
Those who start their retirement planning early and invest regularly are in the best position. Making saving and investing a priority.
The survey was conducted from January 6, 2017, to January 13, 2017, through online interviews with 1,671 individuals (1,082 workers and 589 retirees) ages 25 and older in the United States. RCS results and fact sheets may be found at https://www.ebri.org/surveys/rcs/2017/.
image credit: Alex Chen