Achieving a financially secure retirement requires careful planning, diligent saving, and prudent investing. But are we up to the task? According an overwhelming number of media pundits and articles, very few of us are planning responsibly for our retirement, and most of us are headed for a retirement of financial struggle.
The good news is, these anecdotes are largely wrong. Reliable statistics show most Americans are taking the necessary steps to be on course for a financially secure and satisfying retirement, as summarized in a recent report.1
First let’s take a look at the Social Security Administration model – perhaps the most time-tested model of retirement income and preparedness. This model finds that the median Greatest Generation household, those born during the Great Depression, retired with income equal to 109% of their inflation-adjusted career-average earnings, a very financially comfortable retirement. Little surprise, since this generation has always been renowned for its prudence and frugality.
But what about the allegedly irresponsible boomers and younger generations? It turns out that today’s retirees, who are largely of the baby boomer generation, are faring quite well on average. In 1979 the average retiree household’s income was equal to 73% of working-age households’ incomes. By 2016, retiree incomes were equal to 91% of working-age households’ incomes. And this despite the fact that most retirees have finished putting their kids through college, empty nested, paid off their mortgage, and generally have a lower cost of living.
And Generation X? They are projected to be on par with older generations. The Social Security models projects a median retirement income replacement rate of 110% of career-average earnings for Generation X – about the same as for the Greatest Generation.
So why is this? The simple answer is that the younger generations have drastically stepped up their retirement savings and investments. The private-sector defined benefit pension system has mostly been replaced by a defined contribution system, such as 401(k)s and IRAs. Many people projected the switch to this voluntary system would lead to a collapse in retirement savings. But assets in defined-benefit pensions were typically worth about 16% of gross domestic product. Today, 401(k)s and IRAs have assets worth 76% of GDP. In 1973, total retirement plan assets were equal to 55% of total employee wages and salaries. Today, total retirement savings have increased nearly sevenfold to 375% of employee wages.
The fact is, due to greater financial security and improved health, by many standards retirees today are faring even better than retirees a quarter century ago. According to the US government Health and Retirement Study, 81% of retirees in 2016 described their retirement as either as good or better than their pre-retirement years, up from only 65% in 1992. The Federal Reserve’s Survey of Consumer Finances finds that 75% of Americans age 65 or more in 2016 reported having enough income to at least maintain their pre-retirement standard of living, versus only 61% of retirees in 1992.
Retirement preparation is no easy task, and an effective retirement plan must be designed to weather market downturns and changing personal financial circumstances. There are substantial numbers of pre-retirees and younger people (especially millennials) who are not planning, saving, or investing adequately for retirement. The sooner they get on track the better. Some will not, and their retirements will be financially insecure – perhaps catastrophically so. But the share of Americans with retirement plans, the size of retirement plan contributions, total retirement savings, retirees’ incomes, and retirees’ satisfaction with their financial security are all improving. Overall, our retirement years, with some careful planning, will be the time of freedom and financial peace of mind we all aspire to.
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1. AEI, "Fears of a retirement crisis are overblown — and these numbers prove it," July 2019