NEWS WRAP - Study Suggests 401(k) System Woefully Inadequate for Most
All being well, when an individual reaches retirement they will have enough cashflow to continue their pre-retirement lifestyle; however, a new study indicates that many in the US will be unable to meet even their basic spending needs once they stop working.
The new report, from the Economic Policy Institute (EPI), finds that despite accruing around three decades worth of savings into their 401(k) accounts, most retirement savers between the ages of 56 and 61 have a median account balance of $21,000.*
It would be tempting to think that younger people were better prepared, yet the same study reveals that the first generation of millennials are just as poorly, if not more poorly, prepared for retirement, with a median 401(k) saving of approximately $1,000.*
Inadequate for future needs
According to the Bureau of Labor Statistics, the average American pays out around $3,900 a month just to cover basics such as housing, utilities, food and healthcare. Against this background it is difficult to see how most people's 401(k) plans will adequately supplement Social Security retirement benefits, which are currently paid out at just under $1,500 a month.**
One of those behind the EPI study, Monique Morrissey, believes it is important that policymakers understand that the blame for this shortfall lies with the system rather than with those individuals who are struggling to save for their retirement.
"The system is designed to make people feel bad about themselves — everyone privately thinks that they're screwing up. And yet if everyone is screwing up, then it's clearly a system flaw." ***
And the biggest problem according to the EPI? Inadequate coverage.
Data from the U.S Bureau of Labor Statistics shows us that 40 million people employed in the private sector have no access to an employer-based retirement plan***. The reasons for this are varied – from their employment status through to their length of service – but one thing is clear: for many the system is not fit for purpose.
And, for those who are part of plans, the contribution rate is often woefully low, often contribution rates at auto-enrol programs start out at 3% and rising very slowly to 6%***. These figures ultimately bear very little correlation to how much people will need if they are to retire comfortably.
How much to retire?
According to a new academic study by the executive director of Wharton's Pension Research Council at the University of Pennsylvania, millennials hoping to retire at 65 who wish to have a retirement cashflow equivalent to half their final salary should save 40% of their income over the course of the next three decades (this assumes an investment return of less than 3%).****
However, the reality is that everyone's needs and expectations will be different. Despite this, there is one constant for everyone: the sooner people identify their retirement goals and begin planning for their retirement the more likely they are to achieve a retirement lifestyle with which they are happy.
Get in touch with Blacktower (US) LLC today
Retirement and pension planning are essential for any person who has concerns regarding their wellbeing in later life. If you live in the United States and are a cross-border individual, it is likely that you will have particular needs when embarking on this process.
At Blacktower in the US we have the knowledge and expertise necessary to help you prepare for future retirement and to successfully manage your wealth in the here and now.
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* https://www.epi.org/publication/the-state-of-american-retirement-savings/ Accessed 18-12-19
** https://www.bls.gov/cex/2018/combined/age.pdf Accessed 18-12-19
*** https://www.cnbc.com/2019/12/12/system-is-flawed-when-most-americans-have-tiny-retirement-savings.html Accessed 18-12-19
**** https://www.cnbc.com/2019/10/23/millennials-need-to-save-an-huge-percent-of-paycheck-to-retire-at-65.html Accessed 18-12-19