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Longer lives, reduced support from Social Security, and insufficient contributions to 401K plans: just some of the issues that have made the so-called “Golden Years” of retirement nothing but a distant memory.
With more and more Americans reassessing how they’ll afford to live during their later years, a new book co-authored by two experts at the Center for Retirement Research at Boston College aims to help in navigating the rapidly changing landscape of retirement. Falling Short: The Coming Retirement Crisis and What to Do About It, written by CRR Director Alicia Munnell, CRR Associate Director Andrew Eschtruth and investment consultant Charles Ellis, outlines the impending retirement crisis while offering a call for new thinking and policies on retirement.
“Millions of us will not have enough money for the comfortable retirement that our parents and grandparents enjoyed,” according to the book’s gloomy assessment. “If we do not recognize that we are veering off the road and take corrective action soon, millions of retirees will find that they are too old to return to work and have too little in savings – with no one to turn to for help.”
Falling Short takes on three big questions: How did the country’s retirement system get to the state it is in? How bad is the problem? And what can prospective retirees and the nation overall do about it?
“We need more retirement income because people are living longer, they face rapidly rising health care costs, and rates of return are really low so they need a bigger pile of money,” says Munnell, who is the Drucker Professor of Management Sciences at the Carroll School of Management. “At the same time that people need more, retirement resources are going down. Social Security will provide less relative to earnings before retirement; the 401K system, which could work, has very modest balances; and people don’t use their houses, which is often their major asset. So we’re approaching this big mismatch and people are going to be shocked and fall short of their standard of living when they get to retirement.”
In prior generations, traditional pension plans offered seniors a guaranteed income until they died, but these pensions are rapidly becoming obsolete in the private sector, while the 401K plans that have replaced them are being underfunded by workers. And that’s helping to set up a day of reckoning at retirement because households aged 55-64 with a 401K have an average of $111,000 in those plans, including any assets they have rolled over into an IRA.
“The shocking part is going to be, you retire and when you look at your 401K plan you may think [$111,000] is a lot of money, and then you figure out how much you can take out at a 4 percent withdrawal rate – that’s a few hundred dollars a month,” says Munnell. “That, combined with Social Security, is not going to allow people to maintain the same standard of living they enjoyed before.”
In the book, the authors say Americans have just three choices: “The first is to simply accept that we are going to be poor in retirement. The second is to save more while working, which means spending less today. The third is to work longer, which means fewer years in retirement. Those are our only options.”
To help save more while working, the authors propose either an auto-IRA for those whose employers don’t offer a 401K or – for those in companies that do – an automatic 401K, in which workers are enrolled unless they opt out. “Our retirement system will never be complete until all workers have an automatic saving option to supplement Social Security,” they write in the book.
“Automatic 401Ks still allow an individual the opportunity to say, ‘No, I really didn’t want to be in the plan,’ but this approach is a proven success at improving participation rates,” says Eschtruth. “This should be coupled with ‘auto-escalation,’ which automatically increases the amount you save in your 401K each year for a certain period, so you’re putting away a higher percentage of salary. The escalation might happen around the time when your annual raise or cost of living adjustment kicks in. Again, this feature is something the individual could opt out of but it would point them toward higher saving levels.”
To handle Social Security’s long-term shortfall, the book proposes a payroll tax increase or other measures to raise revenues.
“If you raise payroll taxes by a total of 3 percentage points, split between the employee and the employer, you’d have more than enough to pay benefits over the next 75 years,” says Munnell.
Working longer is another leg to keep the retirement stool from tipping over, because it shortens the retirement period while providing more time to save. While age discrimination, unwilling employers and company cost-cutting are factors in corporate America, Munnell and her co-authors say that if you can delay retirement until 70 and start collecting Social Security then, you’ll receive a check that is 76 percent larger than it would be if you start collecting Social Security at age 62.
“You can work longer to cut down on that retirement period,“ says Munnell. “What a powerful lever that is.”
Another powerful lever is the equity in one’s home that can help buttress a shortfall of retirement income.
“People don’t use their house, which is the asset through which most people accumulate most of their wealth,” says Munnell. “We need to have people use their housing equity one way or the other – either move to cheaper houses or take out a reverse mortgage to get at that equity to support themselves during retirement.”
The overall goal of the book is to serve as a wake-up call to Americans while educating them about the scope of the challenge that’s around the corner and offering specific solutions.
“We don’t want anyone in a position where they feel they have to scramble,” says Eschtruth. “If people keep retiring before age 65 and keep saving at the rates they’re saving at now, many of them are going to be in for a rude awakening. And it’s in a period of your life where you don’t have as many tools to adjust as you would like, especially if you’ve already started retirement and you’ve gone two or three years – and all of a sudden you say, ‘Maybe my nest egg is not as sufficient as I thought.’ It would be harder at that point to get back into the labor force and, better, with hindsight, to have delayed your retirement for a few years.”