We make hundreds of decisions every day. Some more important than others, but the ability to weight opportunity costs in a given situation is crucial. One of the big decisions facing the generation of baby boomers right now is how they are going to support themselves during retirement. Making decisions about retirement savings is fundamental to a sound financial plan for the future. However, data from the National Retirement Risk Index seems to show a dramatic reduction in savings sparking some to speculate about a retirement crisis in the next 15 years.
Fidelity Investments recommends that the average 60-year-old have 10x their annual income in savings. According to the Wall Street Journal, the median household headed by someone between the ages of 55 to 64 has little more than $100,000 in retirement savings. And with the median US income around $50,000, this amount of savings is clearly just not enough. Even with a booming stock market, these statistics are concerning. Low-interest rates, also mean that the return on bond investments has diminished. The impact a retirement crisis could have on the economy could be dramatic, requiring substantial support from the federal government. Social security faces a long-term deficit as well and without reform, benefits would be cut significantly.
Why is it that baby boomers have chosen not to prioritize retirement savings in their long-term financial goals? It should be well known that the “value in use” of a healthy retirement plan is incredibly high. Without income, Americans must rely on this to support themselves with the intention of sustaining their standard of living. However, when evaluating whether retirement plans are worth purchasing from the customer view, it is possible the order qualifiers are just not clear enough. Reduced savings means more spending which is good for the economy but that cannot be sustainable. People are living longer which means they are spending more in their retirement. Rising healthcare costs also pose a risk for those lacking sufficient retirement savings. All of these factors should result in more savings than historical averages but the actual result is the opposite.
The decisions retirement and financial planning firms make could also be affecting this. The way they have tried to educate consumers about the importance of their service could be lacking. Ultimately, however, the real ability to make a change lies with the legislative decision makers. Reforming social security and supporting the lower and middle class while encouraging everyone to save more will be beneficial. Legislators can also make it easier for companies to offer 401K plans to their employees. Overall, many economists believe that we do not need a new system, we just need to make sure it is well-funded and works well.
Other Sources: https://www.wsj.com/articles/is-there-really-a-retirement-savings-crisis-1492999861?mg=prod/accounts-wsj&mg=prod/accounts-wsj
Other Sources: http://crr.bc.edu/wp-content/uploads/2017/02/IB_17-4.pdf
Other Sources: http://crr.bc.edu/briefs/nrri-update-shows-half-still-falling-short/