Thursday, Oct. 22
Posted 11 a.m. Eastern
Wouldn't it be great if we only needed to devote one week to save for retirement? Of course, the resolution passed by Congress designating Oct. 18-24 as retirement week is intended to raise public awareness of the importance of saving for that lengthy vacation that may span 30 or more years.
Most people understand that saving for retirement is a lifelong endeavor that's best initiated in one's youth. But people in their 20s and 30s are generally preoccupied with other financial priorities, like paying off school loans, saving money for a down payment on a house and buying all the accoutrements necessary for their offspring.
If you're in your 40s or 50s and you haven't started saving, that doesn't mean you missed the boat. But you may have some serious catching up to do.
Guess what? We face a shortfall
Not coincidentally, during this commemorative week a new study released by The McKinsey & Co. reveals disturbing news: The average American family faces a 37 percent retirement income shortfall, which translates to a deficit of $250,000 of retirement assets.Of course this isn't representative of every family, and those in the highest and lowest income echelons also have shortfalls that might elicit gasps. But getting back to the average household, here's how the numbers add up: The study says such a family needs an after-tax income of $52,000 per year in retirement. Social Security will provide $21,000 (let's forget for the moment that this program is in jeopardy). A defined benefit plan will pay out $5,000 per year on average (never mind that most people don't have this old-fashioned type of pension plan anymore), while personal savings, including 401(k) plans and IRAs, will generate $7,000 per year. That leaves an annual shortfall of $19,000, which equates to the $250,000 pot of money needed to fund this amount.
The study calls for government, business and the financial services industry to work together to improve the accessibility of retirement plans and increase plan participation and savings rates, among other things.
If something isn't done, the report concludes, by 2035 Americans will be faced by "a staggering $27-trillion shortfall" that will prevent them from "enjoying a dignified retirement."
Note that this study was released by the Financial Services Roundtable, whose 100 largest member companies provide banking, insurance and investment products and services to the consumer. So anything they can do to persuade you to augment your retirement assets by several trillion dollars will certainly benefit them.
It's up to you
But that doesn't diminish the importance of feathering your nest egg, whether by deferring more of your paycheck, making beneficial asset allocation moves or consulting a financial expert if necessary. Self-employed? That's no excuse not to start a retirement plan.But the main point stamped all over the McKinsey report is this: It's all on you to make a plan. "Improving retirement security for Americans requires at its core individual responsibility for saving and investing," the study concludes.
Forget about counting on government for better Social Security benefits. "Social Security is likely impossible to sustain at currently scheduled levels (let alone expanded levels), with trust fund reserves expected to run out in less than 20 years," the study notes.
And forget about employers getting paternalistic by resurrecting those old-timey pension plans. Like Americans' individual retirement accounts, these plans are seriously underfunded. "Defined Benefit plans are approximately 80 percent funded in the aggregate, have largely been frozen or terminated, and are in terminal decline," says the report.
Employers reducing worker benefits
To add to the dour retirement news, Watson Wyatt yesterday released research proving that corporate America's commitment to workers' retirement plans has steadily declined over the past decade. The global consulting firm found that benefit levels as a percentage of pay declined for workers in nearly all the 12 industries studied. For example, in 1998, total retirement benefits in the 600-plus companies studied were valued at 8.2 percent of pay overall, but by 2008, this figure dropped to 6.3 percent, a 23 percent decline. Worst hit were the transportation, manufacturing and communications industries, which experienced declines of more than 30 percent over 10 years.And now one final bit of bad news for the average American, courtesy of the Economic Policy Institute: Guess who stands to gain the most in tax breaks when they save for retirement? Answer: highest earners. According to the report, wage earners in the top 20 percent of the income distribution will get an average tax break worth $3,297 for contributions made in 2012. Meanwhile, those in the bottom 20 percent of the income spectrum -- who can hardly afford to spare any extra change for retirement and who also, let's face it, pay fewer taxes -- get a $2 break on average. The middle wage earners? They get $433 in tax breaks, according to the Tax Policy Center, which is a joint venture of the Urban Institute and Brookings Institution.
OK, so maybe this isn't such a happy National Save for Retirement week after all. But if all this negative news spurs you into action that helps you increase your savings so that you will enjoy a comfortable retirement, then it's worth celebrating after all.
Wonder how you stand? Check out Bankrate's multitudinous retirement calculators, in particular the Retirement income calculator and the Retirement shortfall calculator.