Retirement Crisis? Maybe, or Maybe Not
Whenever the press and financial services industry unite around a story line, it’s probably worth a second look. The idea that America is headed for a retirement crisis is one of those mantras, but in a recent study, analysts with retirement plan consultant Towers Watson reached a somewhat rosier conclusion.
The study, titled “American Workers’ Retirement Income Security Prospects: A Critique of Recent Assessments,” notes that “some assessments of what workers should save and when they should save it dramatically understate the adequacy of retirement savings for many households.” Most notably, it recognizes that progress in saving for retirement usually is not linear.
Spending demands relative to income tend to be greater in the years spent establishing a home, raising children, etc. The kids’ college costs often force a temporary pause in the process of retirement savings. The Towers Watson study suggests that a couple with two children is carrying expenses comparable to 2.64 adults living separately, while a childless couple is covering the equivalent of just 1.63 solo adults.
But as mortgage payments and college costs fall away, the retirement income to sustain one’s lifestyle may be more achievable than it would have appeared during the child-rearing years. Of course whatever one can save early in a career can make a big difference. Taking advantage of an employer’s 401(k) match and other tax-deferred savings opportunities can build assets positioned for investment returns during those middle years when the ability to make new contributions may be strained.
The study suggests that overly pessimistic or daunting assessments can actually discourage rather than stimulate efforts to save. Morningstar’s Vice President for Research, John Rekenthaler, reinforces that concern. He notes that in early testing of Morningstar’s online retirement-advice software, “almost half the users quit the program after seeing their ‘gap’ page – the difference between the retirement income they sought and the retirement income they were on track to receive.” Morningstar tweaked the program to deliver the mathematical reality a little less discouragingly, but it still presented a psychological hurdle.
Several studies have promoted a retirement income target of 85% of one’s preretirement, pretax income. With some moderation of expenses and effective tax and Social Security planning, a little lower replacement ratio might suffice. On the other hand, there’s comfort in creating a meaningful margin for error, and that still argues for saving as early and often as you can.
For an overview of the elements of retirement planning, see our brief video, How to Save for Retirement. Mallery Financial also offers its own online retirement assessment tool. Unlike Morningstar's, however, ours involves a human that generates your report and provides personalized commentary and guidance with the results. Try it out and see where you stand.