Great Opinion piece on the coming Retirement Crisis.....

[leahjade]

This is a great link in her article to calculate what you will need to retire!
It was very close to the figure that I figured we would need - a lot more than most people realize though I'm afraid! Better to know so you can adjust your figures now before it's too late!

 

[Colleen27]

It hasn't failed - people just have FAILED to invest enough or any at all! Too many people expect the government to take care of them in their old age. Start having money taken off your paycheck for a 401K when you are young even if it's a small amount. If it's taken off as soon as you start working, you don't even miss it.

It has failed. The shift from pensions to 401k was essentially a massive pay cut for most American workers - now retirement savings have to come out of their earnings, rather than being a benefit provided by employers, but wages didn't increase to compensate for that shift. It isn't an expectation that government will provide, it is an economic reality of being told to do more with the same (and these days, often less) money.

The median annual wage in America is just over $26K/year. People trying to live on that, or raise a family on the median household income of $49K/year, aren't blissfully spending away while assuming the government will provide for their retirement. They're barely getting by and just don't have the ability to put a large percentage of their pay away to establish even a modest retirement fund, never mind enough to retire in any sort of comfort. The calculator linked in that article projected we need 1.4m to retire with the same standard of living we have now (as a near median income family, assuming no social security), and suggested upping our savings to 32% of our annual income to meet that goal. That's just unattainable for those of us down here in average-income land.

 

[leahjade]

The shift from pensions to 401k was essentially a massive pay cut for most American workers

Those pensions were not sustainable now that people are living into their 80's and 90's and have put many corporations out of business (including one Fortune 500 company that my husband worked for). Not to mention what those pensions have done to the taxpayer, in particular school districts, due to teacher pensions. Look at Scranton, PA who had to file bankruptcy because keeping up wage, retirement and healthcare commitments that it no longer has the revenue to pay off.

 

[leahjade]

That's just unattainable for those of us down here in average-income land.

Not true, we are on track and are definitely middle class people! We live very frugally and paid off our house early and put that savings into retirement. Most of our friends are on track as well and all of us are far from upper class. It takes sacrifice, planning and hard work but don't say it can't be done!

 

[ilovemk76]

Most 401K plans are opt-in and thus most do not bother to opt-in. They all need to be changed to opt-out plans and then most will not bother to opt-out.

 

[ilovemk76]

I think this is very much a perception dictated by our own socio-economic position. I know a lot of people who say they can't afford to save, and I believe them. They're trying to make ends meet on 30-40K/year while health insurance, food, and energy prices go up while pay is frozen and hours/overtime cut, and they're driving 10 year old cars just to get by. There's just nothing leftover to save for that demographic and I think the people who write the articles and discuss the issues tend to forget just how many Americans spend the bulk of their working years in a legitimately paycheck-to-paycheck income bracket.

This group will live the same or a slightly lower standard on just SS. It is the ones who are use to more than SS will pay that need to save to generate the difference they are accustomed to.

DH and I will both get our own SS. We will each get, based on waiting for full retirement and in future dollars, $2500/month each. We are planning on $0 in SS but since we are both in our 50s, we should get some SS. We will treat is as "found" money. There could be means testing but only time will tell.

 

[bedogged]

60 years old and just laid off 2 weeks ago. I don't know where I am going to find somebody to hire me. I have money saved for retirement, more than that $30K, but I definitely am not ready emotionally or finally to retire.

I am so sorry! It is really scary to be in your situation. Will you be able to at least receive unemployment?

 

[Colleen27]

Those pensions were not sustainable now that people are living into their 80's and 90's and have put many corporations out of business (including one Fortune 500 company that my husband worked for). Not to mention what those pensions have done to the taxpayer, in particular school districts, due to teacher pensions. Look at Scranton, PA who had to file bankruptcy because keeping up wage, retirement and healthcare commitments that it no longer has the revenue to pay off.

I'm not saying that pensions are sustainable or the answer, only that the shift to personal retirement savings could have been managed far better from an employee standpoint. Transitioning into defined contribution schemes would have gone more smoothly all around if it had been 1) an opt-out system rather than opt-in, and 2) accompanied by a minor pay increase to acknowledge what the employee is losing in the change-over.

Not true, we are on track and are definitely middle class people! We live very frugally and paid off our house early and put that savings into retirement. Most of our friends are on track as well and all of us are far from upper class. It takes sacrifice, planning and hard work but don't say it can't be done!

I suspect that you, like most DISers, have a very different definition of middle class than statistics bear out. When someone raising a family on that median income of 49K/year sees a number equal to 25+ years of earnings recommended for a reasonable retirement, he's not just going to buckle down and get there. We live very frugally in a paid-for home driving old cars, but to be on track for the recommended retirement figures that those "very good" calculators put out would require saving every single dime of disposable income - no vacations, no cable, no dining out - for the rest of our working years AND earning an above-average rate of return for that timeframe.

This group will live the same or a slightly lower standard on just SS. It is the ones who are use to more than SS will pay that need to save to generate the difference they are accustomed to.

DH and I will both get our own SS. We will each get, based on waiting for full retirement and in future dollars, $2500/month each. We are planning on $0 in SS but since we are both in our 50s, we should get some SS. We will treat is as "found" money. There could be means testing but only time will tell.

The big question is whether SS will be there. It probably will for you, but every piece of advice I've read for my generation says to plan on not seeing a dime of that. We're supposed to be saving for our own retirement while paying taxes to support our parents' retirement with no return on those dollars for ourselves. And that makes a huge difference in retirement planning; for us, zeroing out the expected SS benefit makes almost a million dollar difference in our recommended savings target.

 

[dvcgirl]

It hasn't failed - people just have FAILED to invest enough or any at all! Too many people expect the government to take care of them in their old age. Start having money taken off your paycheck for a 401K when you are young even if it's a small amount. If it's taken off as soon as you start working, you don't even miss it.

I agree with you, but like Colleen27 said, unfortunately people just aren't doing it. Whether they are able and just aren't doing it, unable or have had a run of bad luck....it's clearly not working.

I've been reading about this "coming storm" for 15 years now and the numbers only get worse. However, the last thing I want is some sort of "government retirement program" that is somehow going to magically guarantee a 7% return.

I was just listening to a Planet Money Podcast today and they were talking about another HUGE problem.....state and municipal pension programs and the huge deficits that they are facing. For many years, most of these pensions assume an 8% return on their investments and then report the state of their pension programs. Well, the organization that oversees most state pension programs is about to change that 8% number, in some cases to as low as 5%.

They used Illinois as an example. As it stands now, Illinois is working off the assumption that they'll get that 8% return going forward. Even with such a good return for a program like that....they are projecting that their pension plan (this is for teachers as well)....is 53% short. Now, when they're only allowed to assume that they'll get a 5% return that number will positively skyrocket up.

So, if you live in Illinois and you've been promised a pension from the state. Don't count on it. Seriously, start saving like a crazy person outside of your pension, because the state simply doesn't have it. And the same holds true for many other states.

So, the magical "guaranteed 7% return" is a fantasy in our world today. I'm not saying it isn't possible, but what happens in these pension plans is that they'll take a huge hit like they did in 2008-2009, and then they have to go out further and further on the risk curve to try and recoup some of their losses.

So, as terrible as the 401K/IRA retirement plan has been for most Americans, I'll take it *any* day over a state or municipal pension these days.

Ask the people in Greece if they ever in a million years thought that they'd see the austerity that they are experiencing right now. Massive cuts to pay for government workers. Huge increases in taxes across the board. Now, I'm not saying we're Greece, but some of our states resemble Greece. And the states can't print money.

Things will surely get "interesting" in sort of a terrifying way as we go forward.

 

[dvcgirl]

This group will live the same or a slightly lower standard on just SS. It is the ones who are use to more than SS will pay that need to save to generate the difference they are accustomed to.

DH and I will both get our own SS. We will each get, based on waiting for full retirement and in future dollars, $2500/month each. We are planning on $0 in SS but since we are both in our 50s, we should get some SS. We will treat is as "found" money. There could be means testing but only time will tell.

We never factor SS into our retirement planning either. We will look at it as bonus money, but I do think it will be there. Maybe years ago I worried about it, but I do believe that we'll all see SS checks. SS really isn't in horrible shape. It wouldn't take much to fix it. Medicare is the real challenge.

I believe that in the worst case scenario, meaning that there's no SS surplus fund (and there isn't....there's just a box full of IOUs), that we'd all get 70% of our SS check.

However, since so many Americans are going to be depending on every penny of that SS check (many of those Americans didn't think they'd end up in this category), we may end up seeing means testing on the higher end of income earners. So, maybe knock off 20% or so to help those on the lower end.

Still, I'd say 50% is a "worst case scenario" on the SS front.

But there are going to be plenty of people I know who earn over 150K a year who will need every penny of that money. Simply because they're not saving anything close to what they'll need. I'm telling you right now, the higher income earners are in for it....they're in large part unprepared.

We're going to see a huge drop in lifestyle in this country for a lot of Americans who never thought they'd experience that.

 

[dvcgirl]

Actually not really.

Now I'm in my 50's when I was growing up the mantra was get a good job with a pension. So when dh and I first got married we didn't save much for retirement. Now not saying I regret what we did and we were never ones to live way beyond our means but I really didn't start contributing to my 401K until my late 30's.

Now factor into what MrsPete alluded to.... unexpected things.

Sadly my dh was diagnosed with cancer this year, luckily we had safe guards in place (disability insurance) to protect his income but the fact of the matter is, it maybe he won't be working until he's 63. Now both our jobs still offer pensions and dh is also pretty luck in that he'll have enough time on his job in 2 years to get the full pension if he retires but some times I think that was more due to luck than any great skill on our part.

There are so many factors that influence some ones ability to weather tough financial times.

eliza61. I love your posts and pretty much always agree with you. So, I'm really sorry to read that your DH was diagnosed with cancer this year. I sincerely hope it's treatable and that he has a full recovery.

Still, even with a late start saving and this terrible news, it sounds like you're really in good shape. The disability insurance is huge. That's a big expense for us...disability insurance, but it's worth it. I'm really glad you guys had it.

 

[disney1990]

Not true, we are on track and are definitely middle class people! We live very frugally and paid off our house early and put that savings into retirement. Most of our friends are on track as well and all of us are far from upper class. It takes sacrifice, planning and hard work but don't say it can't be done!

Some of that also depends on what part of the country you live in. Housing prices in the Maryland/DC/Virginia area don't leave much left to pay off your house early or fully fund a 401k. I have been putting money in one for 22 years and at this rate may never have enough to fund retirement. I am very close to retirement age and have been laid off yet again.

 

[dvcgirl]

I think she loaded the deck a bit in that second paragraph. Saving for retirement isn't rocket science, and most of us have access to 401K plans through work. Information is available everywhere. We're not quite as "in the dark" as she implies. My husband's a tech guy and I'm a teacher, and we're able to navigate the world of investments and retirement planning without undue stress -- we're ahead of the game for our age bracket.

However, she is right when she says that planning 40 years ahead of time isn't something that most people will do. I don't think it's a lack of cognitive inability; rather, it's a lack of perspective and a lack of priority -- when you're 25, retirement seems so far away. You think you have time to do that next year, or the next year, or the next year. Then suddenly you're 50 and have little saved.

Also, we live in a consumer culture. We are hounded on every side to spend, whereas saving is something that isn't rewarded today. So many of my friends complain that they "don't make enough to save", yet they live in nicer houses than I do, eat out more, buy more clothes, etc. Most of my friends (and their kids) have a SmartPhone, take expensive vacations, etc. I know one couple who's flat-out said, "Nope, we're not saving for retirement or our daugther's education. We'd rather cruise 3-4 times a year. We'll just deal with whatever comes later." It's tough to include tomorrow's needs in today's budget, and I think most people just aren't doing it.
I was also waiting for her solution at the end!

I agree Mrs Pete. It's not rocket science to save for retirement in the 401K/IRA system. But we do live in an "instant gratification" world. And 40 years is a long time. Throwing that money in month after month, year after year.....well, clearly Americans aren't good at doing this.

I'm not sure if there's another country that has a voluntary system like we do. Clearly, the Europeans don't want it. They're happy paying very high taxes to have their governments care for them.

Has there ever been a model like ours? And even if there is one, is it on a gigantic scale like ours is? I don't know....it's an interesting experiment.

The problem is, that 40 years into the experiment....it's not looking so good. And now that the genie is out of the bottle as far as defined contribution plans are concerned (traditional pensions), the likelihood that they'll be back....well, look out your window for those flying pigs. It ain't happening.

 

[eliza61]

I agree Mrs Pete. It's not rocket science to save for retirement in the 401K/IRA system. But we do live in an "instant gratification" world. And 40 years is a long time. Throwing that money in month after month, year after year.....well, clearly Americans aren't good at doing this.
I'm not sure if there's another country that has a voluntary system like we do. Clearly, the Europeans don't want it. They're happy paying very high taxes to have their governments care for them.

Has there ever been a model like ours? And even if there is one, is it on a gigantic scale like ours is? I don't know....it's an interesting experiment.

The problem is, that 40 years into the experiment....it's not looking so good. And now that the genie is out of the bottle as far as defined contribution plans are concerned (traditional pensions), the likelihood that they'll be back....well, look out your window for those flying pigs. It ain't happening.

LOL. no we're not, Also we've kind of been "conditioned" to buy now/pay later. My kids laugh hysterically when I tell them that back in the "olden" days banks gave you gifts if you opened savings accounts, savings bonds could be brought automatically through your company and we didn't go to the mall simply because we were "bored".

In Southern NJ we have a store called "Raymour and Flannigan" it's a furniture store, they have a commercial where you can buy a room full of furniture and not make a payment on it until 2016!!

I also think though we do a terrible job of "educating" ourselves and our younger generation.

For example, my youngest son just graduated H.S. and not once in his 4 years did he have a basic "money" course. When I was in school there was a basic "home eco" course. Many of his friends knowhow to use a credit card but don't have bank accounts. When he got his first job, I remember laughing at his shocked expression when I explained the deductions that were taken out of his check. LOL.

Anyway even my job, we have a great 401K plan run by Merril lynch and not once did anyone kind of explain the different funds that were available etc, etc. we have an option where you pick the year you think you might retire and then ML does the rest. so most employees will pick say 2030 and the funds are automatically picked. They have no idea what funds are chosen, how that fund is doing, what fees or any thing else.

PS. thanks for the well wishes.

 

[Chris the CPA]

Its sad that even though the Europeans are paying through the nose they still can't collect enough to cover what has been promised.

As much as it pains me to say it I would like to see part of the social security contributions and match go into an account held with limited investment options that the citizen can use for retirement or pass to their heirs should something happen. They can still use another portion of the contribution to fund a disability policy and part to pay for current participants. This would probably only work for folks currently under thirty five.

 

[beaucoup]

I know a few people who I can bet don't have anything taken from pay & going towards retirement. They wanted a newer bigger house now instead. Sad thing, in range from 45 - 50 yr olds. And they will still have mortgage payments when / if they retire. One of them is 50 & working 2 jobs.

Yup, its all about NOW to some people. I have no idea what they are going to do when old, can't work, still have a mortgage payment and no money in the bank.

Sad really. There is just no telling some of them. They refuse to hear it.

 

[luvmy3]

I'm not saying that moving jobs constantly (like many do these days) makes it impossible to save, it makes it harder to save. There are so many things to think about when leaving a job and starting a new one, only a part of it being retirement, that if you are doing it every 2 to 3 years, like my husband and I do, it's not as easy as if you were working at a job for 30 or 40 years and consistently saving and getting a company match.

Well I guess this line of thinking is why 75% of you won't be prepared for retirement. You mentioned "no company match" in your previous post and now you are saying that is why its hard to save, but I disagree. There is nothing stopping anyone from opening an IRA, and while you may not have as much in there as someone who has a 401K with a company match, it doesn't make it harder to save something for it. Its about being disciplined and not using the excuse that you aren't getting "help" from a company. Like I said before I'm a SAHM and have an IRA. Why, because dh and I made that a priority even though someone wasn't matching 5% of what we put into it

 

[crisi]

I'm not saying that moving jobs constantly (like many do these days) makes it impossible to save, it makes it harder to save. There are so many things to think about when leaving a job and starting a new one, only a part of it being retirement, that if you are doing it every 2 to 3 years, like my husband and I do, it's not as easy as if you were working at a job for 30 or 40 years and consistently saving and getting a company match.

Why are you switching jobs so often? Most people I know who do that are doing that because they are climbing a corporate ladder. And every time they move they are getting a sizeable pay increase. That translates into being able to put more money away, not less. Granted, it takes some discipline if the companies you are moving to don't allow contributions for a year to do your own saving for a year, but even that isn't hard now with automatic transfers at the bank.

I get the "we are barely making ends meet without saving of its hard to save" - student loans, mortgages, daycare - those can eat up a middle income paycheck and not leave a lot of room for saving for college, saving for retirement, having an emergency fund. I don't get the "its hard to save" if there is a little room in your budget if its just a matter of logistics. I have money coming out into a 401k - that was easy through my own employer. I have money moving automatically into 529s, I had to set that up as an autodeduction from the 529 provider, I have money moving monthly into savings and into the stock market - none of these took more than five minutes to set up (the 401k maybe a few minutes more - I needed to get my husbands SSN).

I also get the "its hard to save" when I'd rather spend my money on vacations or shoes or HBO or dinners out or concert tickets or.....that takes discipline. But where the first kind of "its hard to save" is something I'm sympathetic with, I'll admit that I have very little sympathy for anyone claiming "its hard to save for retirement/college/emergency fund" and who goes on vacation and has cable.

What I hope happens is we means test Social Security by looking at your lifetime income - not your lifetime savings and what you'll have to live off of. If you've spent your life raising kids at or slightly above the poverty line, you need all the help you can get. If your choice was to drive a BMW rather than putting money into a 401k when you were in your 40s, I'm not sure "we" should be worrying about you.

 

[Ginny Favers]

Well I guess this line of thinking is why 75% of you won't be prepared for retirement. You mentioned "no company match" in your previous post and now you are saying that is why its hard to save, but I disagree. There is nothing stopping anyone from opening an IRA, and while you may not have as much in there as someone who has a 401K with a company match, it doesn't make it harder to save something for it. Its about being disciplined and not using the excuse that you aren't getting "help" from a company. Like I said before I'm a SAHM and have an IRA. Why, because dh and I made that a priority even though someone wasn't matching 5% of what we put into it

I HAVE made it a priority, rolled over my money into IRAs and kept putting money into it, just as you have, all along, but without the company match that kicks in only after you've been at a company for awhile, it doesn't add up as fast and I definitely won't have as much as the calculators are saying I'll need for retirement. That is ALL I am saying. Not that I am not saving, but that it doesn't add up as quickly and that I won't have as much money saved as those who stay at a company for 40 years. This is the norm for people who switch jobs often.... which is more and more the case, these days.

 

[leahjade]

Housing prices in the Maryland/DC/Virginia area don't leave much left to pay off your house early or fully fund a 401k.

Our mortgage rate was even 18.50% when we bought our house so it can be done! And no, we are not at the high end of middle class - very much in the middle and many of our years starting out we were in the very low end of the bracket.
But I've never had a manicure or pedicure, don't have a smart phone or laptop, buy basic cable, color my own hair etc. It's a lifestyle that many don't want to commit to.
A co-worker who has nothing saved (and has a very similar family income as mine) gets her mani-pedi every week, bikini wax, highlights, tanning etc. and when I suggest doing those things yourself and putting the money in a 401K, she says $20 here or there won't help. Oh, yes it does! $20 or $30 every week (especially if it's matched) makes a huge difference when multiplied by 40 or 50 years! There are a lot of people who just want it all, but don't want to sacrifice anything!