Retirement Crisis or Underfunded Retirement; What’s the Reality for Most Americans?

Over 30 years ago, the first reports that a retirement crisis loomed for America started to hit the news cycle. Concern of a looming retirement crisis began as fewer companies were offering pensions, the first worries regarding Social Security solvency emerged, and research indicated insufficient retirement savings for many Americans.

During this time and since, 401(k)s became much more prevalent with the decline of pensions, and the onus shifted more to the individual versus the employer for helping to ensure adequate retirement income. There is a nostalgic belief that before the 401(k), most Americans had access to a pension program, which in reality simply isn’t true. At the height of pensions in the late 1970s and early 1980s, only 38% of Americans had access to a pension according to the US Bureau of Labor Statistics, and even fewer qualified to receive a pension due to strict vesting rules around years of service (generally 5-10 years). Compare that to over 73% of civilians now having access to a retirement plan as of March 2023, according to the Bureau of Labor Statistics.

Yet the drumbeat of a retirement crisis continues. There are real fears that each generation won’t have enough to live on during their retirement given added factors like longer lifespans, rising healthcare costs, poor saving habits, inflation, employment trends, and more.

But wait a second! How are we in a retirement crisis if more people have access to retirement funds than ever did during the golden age of pensions? Are we really on the brink of a full-on retirement crisis? Or is it potentially more of an underfunded retirement? This article will discuss both, the growth of retirement plan coverage, but most importantly, how you can take control and live a financially secure retirement.

What is a Retirement Crisis versus an Underfunded Retirement?

A retirement crisis is when a large portion of the population will outlive their savings and will live in poverty and/or be reliant fully on the government (e.g. Social Security and other programs) to survive. This may also put strain on younger generations due to potential tax increases to help fund government programs as well as trying to help with their elderly family members’ expenses.

On the other hand, an underfunded retirement is when a large portion of the population has some personal and/or retirement savings, but not enough to live at the same standard of living as pre-retirement. This can often mean living on less or could require working longer, well into retirement years, to live at a similar standard of living.

The Three Pillars of Retirement for Financial Security

The three-legged stool analogy has driven the general thinking on how to be financially prepared for retirement. The pillars include:

1. Saving in a retirement plan
2. Personal savings
3. Social Security benefits

A note on Social Security: Social Security is designed to help care for the very basic of needs so that the most vulnerable can have some economic security and avoid homelessness. It can be a great supplement even for those with savings, although there are questions about how to continue to fully fund Social Security in the years ahead. Because of this uncertainty, it’s more important to focus on a retirement plan and personal savings as the key to living a financially robust and secure retirement.

401(k) Growth and Greater Access to More Americans is Making a Difference

Before 1980, there was no such thing as a 401(k), and pensions covered fewer than 38% of Americans. As mentioned before, 73% of civilians now have access to a retirement plan with the 401(k) being the most common. The growth of 401(k)s has been a huge benefit for Americans to build for retirement, and has continued to evolve to better meet their needs. High contribution limits, tax advantages of tax-deferred or Roth 401(k) savings, automatic enrollments, payroll integrations, and employer matching have made 401(k)s a simple, smart way to save. In many ways, the 401(k) has become the strongest foundational leg of the retirement pillars.

However, the 401(k) still has more room to grow. The biggest opportunity to covering more Americans is for more self-employed (yes, there are Solo 401(k) plans) and small businesses to start a plan. While a 401(k) is a cost-effective benefit, fewer than 25% of small businesses offer plans and likely less than 8% of the self-employed use a Solo 401(k).

Why the Alarm Bells of a Retirement Crisis?

Beyond Americans living longer post-retirement and high health care costs as we age, many Americans will not attain what industry experts suggest as enough money for a comfortable retirement. The common guideline for retiring comfortably is to build savings to ten times your annual earnings by age 67. Quite a few of us may not reach this target, but that doesn’t mean we’ve reached a “crisis”.

Many can choose to work longer, others to live on less, and some have other family members or resources to lean on. So, while a retirement crisis is not likely looming for most, being underfunded in retirement is a real risk.

Do be fully aware that the lowest quarter of wage earners, have and remain the most at risk of serious financial struggles now and upon reaching retirement age.

How You Can Avoid an Underfunded Retirement

To put yourself in the best position to avoid a poorly funded retirement, here are some best practices:

Strive to put 10-15% of your earnings in your retirement account each paycheck for your entire career. If you have a 401(k) with an employer that matches, the company match counts towards this goal. At minimum, ensure you are receiving the match. If you don’t have access to retirement plan at your place of work, start an IRA and make contributions up to the maximum allowed.

If you started late with your retirement savings, know that there are catch-up options in your 401(k) when you reach 50 years of age that can help. There are targets to shoot for that can help you think about where you are and tactics to consider.

Build a rainy day fund. Early in your career this may be one to three months of your earnings and then expanding to a full year as you become a big earner. As you approach retirement, having two years of expenses covered in a high interest savings or money market account is key to weathering financial market downturns.

Bonus tactic for the self-employed and small business owners: start a 401(k) plan and reap the tax credits and deductions that make these plans very affordable.¹

So, while many may struggle with an underfunded retirement, there’s a lot you can do to boost your savings while you are still working. Do know that making smart money saving moves and diversifying your savings can be a big help no matter what the future holds. Here’s to a healthy retirement (and to avoiding the retirement crisis altogether!).

Takeaways:

• Since the 1990s, there have been consistent concerns that a large population of Americans will outlive their savings, resulting in mass poverty, reliance on the government for assistance, and financially burdening younger generations.

• However, the vast majority of Americans are likely in a position to meet their retirement saving goals or be somewhat underfunded but will likely avoid a financial crisis.

• 401(k) plans have dramatically increased the coverage and access to a retirement plans for Americans at a vast increase from the peak of pensions.

• The three pillars of retirement plan savings, personal savings, and Social Security are considered the means to funding a secure retirement.

• Any size business can start a 401(k) plan, and there are tax credits and deductions to further minimize costs.

• Experts advocate that you can build a financially secure retirement by saving 10-15% of your earnings over your career. This can be through your company retirement plan, personal savings, or both.

¹Sharebuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.