Many Americans don’t have enough money to carry them through retirement—and many of them know it. That’s clear from recent studies, and it’s evident in the responses to last week’s Strategies column, “For Retirees, a Million-Dollar Illusion.” The column showed that in this environment of ultralow interest rates, a retired couple could easily exhaust a $1 million bond portfolio, even with relatively modest withdrawals. Most households only wish they had that kind of money. As I wrote on the Bucks blog in an initial response to readers, the column focused on $1 million because of its symbolic power, not because it represents the savings of a typical American family. In fact, the median financial net worth of American households of all ages, excluding homes and cars, is $10,890, as estimated by Edward N. Wolff, an economics professor at New York University. For households headed by those in the 55-to-64 age bracket, it’s $61,300. A large majority of Americans are in far worse straits than the millionaire households. Some readers asked how to protect their financial nest eggs. Others observed that in this economy, saving more and spending less wasn’t always possible. I’ll return to challenges like these in future weeks. But first, it’s worth examining some of the systemic issues that led to this state of affairs. My previous column didn’t directly address the big picture — and that picture is troubling. As Jack VanDerhei, research director of the nonprofit, nonpartisan Employee Benefit Research Institute, puts it, “very large numbers of people are at risk of running out of money in retirement.” In a recent study, the institute found that roughly 44 percent of households in the baby boom and Gen X generations — those born from 1948 to 1975 — were likely to run short of cash in their retirement years. And forthcoming research from the institute finds that low bond yields are worsening the situation. These low rates are unlikely to continue indefinitely; global markets last week were in disarray over speculation that the Federal Reserve might take action that could lead to higher rates. But if current low yields did persist indefinitely, Mr. VanDerhei has found, 56.7 percent of boomer and Gen X households would find themselves at risk of running through all their assets in their lifetimes. Many people sense that they’re heading toward danger. In an October survey by Pew Research, 38 percent of adults said they were “not too” or “not at all” confident that they would have enough income and assets for retirement, up from 25 percent in late February and March of 2009. Strikingly, more than half of those in their late 30s were in the not-confident categories, compared with only about one-third of those in their early 60s. One reason for this disparity may be that many people in their 30s have barely been exposed to the traditional pensions — known as defined-benefit pensions — that were the dominant retirement vehicles until the late 1980s. Older people often have rights to what’s left of those traditional pensions. In the private sector, when retirement plans exist at all, old-fashioned pensions have largely been supplanted by 401(k)s and other defined-contribution plans. While the introduction of default options has improved matters, how much to save and how to invest the money are fundamentally the responsibility of employees, who are directly affected by the vicissitudes of the markets. “It’s crazy that we ended up with this as our retirement system,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. The 401(k), she says, was intended as a supplement to a traditional pension and to Social Security. “It was supposed to be money that you could use to go to Paris,” she said. “Instead, it’s become our basic system.” Because we depend on accounts like 401(k)’s, she said, we should strengthen them through measures like mandatory automatic enrollment and incentives for employee contributions of at least 10 percent of wages, with an employer match equal to half of those paycheck deductions. BUT 401(k)’s are only part of the problem. When people leave a job, they often “roll over” their accumulated workplace holdings into an individual retirement account, for which they bear sole responsibility. By now, I.R.A.’s are the biggest repository of private sector retirement assets. In the fourth quarter last year, according to Federal Reserve figures, I.R.A.’s contained $5.4 trillion, compared with $4.1 trillion for defined-contribution plans and only $2.5 billion for defined-benefit plans. Yet many people are ill equipped to manage these vital assets. And because asset management firms aren’t all required to follow a uniform fiduciary standard, individuals may not always be getting advice that is solely in their best interests. Then there’s Social Security. Mr. VanDerhei says it’s essential. It should prevent older people from becoming entirely destitute if all else fails, even if medical and nursing care drains their cash in retirement. If Social Security benefits were eventually cut, as is sometimes contemplated, many more people would find themselves in distress. How would society cope then? “That’s the $64,000 question,” he said. So what is to be done? The problems are huge and may require big solutions. Individuals can weigh in on these public policy issues, and they can take measures to improve their own prospects. Professor Munnell’s institute provides guidelines for how much you might try to save, how much you might be able to spend safely and when you can afford to retire. (The numbers look better when you save early and retire later.) Mr. VanDerhei has helped build an online calculator that gives a ballpark estimate of “approximately how much you need to save to fund a comfortable retirement.” Many financial firms offer such calculators, too, though they may use them as marketing devices to sell their services. How to navigate the markets — and how to maximize your chances with the assets you’ve accumulated — is a major concern of this column. Over time, expect further answers.
Here is a solution: Stop worrying about the masses and control “you”. It’s not your problem to worry about the global retirement pandemic. Make your plan and control your destiny.