By Teresa Kuhn, JD, RFC
According to a 2015 report by the United States General Accounting Office (GAO), over half of all Americans had nothing saved for retirement. By this I mean literally NOTHING; no pensions, no 401(k)’s, no permanent life insurance, no jars full of silver quarters.
Worse still, at least in my opinion, is that the few Americans who have scrimped and saved and put away money have, on average, accounts worth only about $104,000. To put this in perspective: that $104,000 nest egg, even with prudent investment, will only yield around $300 per month at retirement. Often times I find people with these plans are deceived into thinking that the monthly payments will magically grow and be enough to ensure a good retirement. That just isn’t possible.
It’s no surprise to me that financial news media reports indicate nearly 70% of Americans will not be able to retire comfortably. At least they won’t be retiring to lives like those pictured on the glossy brochures of conventional retirement vehicles.
The marketing departments of big retirement planning companies continue to push the idea of retirement as lazy, warm days on the beach, walking hand-in-hand as the sun sets, going water skiing, playing golf, enjoying life to it’s fullest.
Americans have no trouble buying into the fantasy of a comfortable, enjoyable post-work life. After all, many of us have looked on with envy as our Greatest Generation and Baby Boomer parents and grandparents have been able to enjoy exactly what the brochures promised.
The sobering truth about retirement in the 21st Century, however, is that more of us may be living in poverty than enjoying a comfortable, satisfying life. Many will find themselves in the unfortunate position of needing public assistance, or having to borrow money from friends and family. That dream house may actually be a run-down apartment in the worst part of town, a room in a relative’s house, or even a shelter.
So, why is this happening in the United States and what, if anything can be done to alleviate the problems faced by those facing retirement?
Debt Is Not The Only Player – Life Has Gotten More Expensive
Debt is always a concern, particularly as a person nears retirement. And, it is definitely a wise idea to make debt elimination a priority. However, debt isn’t as much of a factor in Americans’ inability to save as you might think. Much more relevant is the fact that most of us have little to nothing left after we pay our bills. For example, the cost of food has gone up nearly 5% in just the last year with some staple items rising even more. Facing such increases and the fact that wages are stagnant, many people find they spend every dime just to survive.
Elimination Of Traditional Pensions and Post-Retirement Benefits
Days before completion of it’s $150 billion merger with Dow Chemical, corporate giant DuPont offered 9,500 vested employees under the age of 62 lump sum payments in an attempt to decrease it’s looming pension gap. The offer allows employees who aren’t old enough to start collecting their pensions (usually age 62.5) the chance to get a one-time payout.
Sounds great, doesn’t it? I mean, after all, a bird in the hand is always worth 2 in the bush, right? For most of those who opt for this lump sum, the results will probably not be so positive. Some pension experts say that in cases where employees settle for lump-sum payouts, nearly one third of them will have spent the money BEFORE reaching retirement age.
Last year, DuPont announced that in 2018, it will no longer contribute to active employees’ pension plans, a move that saves money but puts over 13,000 employees’ retirements in jeopardy. Additionally, DuPont will cease to provide medical insurance for many of its’ retirees.
DuPont’s actions are the new normal as large corporations seek new ways to bolster sagging profits and eliminate debt. More and more companies will replace their pension plans entirely with 401(k)’s, which, as I have written about before, are nowhere close to living up to the hype of the companies that sell them.
Increased Health Care Costs For Retirees
Not only are old school pensions becoming rarer and rarer, but post-retirement medical benefits are also on the wane. This means seniors, even those on Medicare, are footing more of the costs of keeping themselves healthy.
Even with good medical care and a healthy lifestyle, 50% of all Americans will spend at least some time in a nursing home. According to Genworth, one of the country’s largest producers of Long Term Care Insurance, only 5% of Americans have long term care policies in place.
The average nursing home stay is just over 892 days (2.5 years) while Medicare only covers about 100 days of nursing home stays. With nursing home costs running anywhere from $4,000-$9,000 per month, it’s easy to see how a family’s entire savings could be wiped out.
401(k)’s and Other Retirement Schemes Aren’t Working As Planned
According to journalist Timothy Martin in his January, 2017 article in the New York Times, early architects of what are now called “401(k)” plans are having a lot of second thoughts. Writes Martin:
“Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.
Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.”
While not everything is wrong with 401(k)’s, there are enough problems to warrant caution on over-reliance on them as a primary retirement vehicle, especially since there are no hard caps on the management fees that can eat into your retirement money.
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