In 2007, The Center for Retirement Research at Boston College published a research paper entitled, Is there really a retirement savings crisis? An NRRI Analysis. And in the 2022 winter edition of National Affairs republished a 2014 article written by Andrew G. Biggs & Sylvester Schieber entitled Is There a Retirement Crisis? However, a recent op-ed for ThinkAdvisor by Andrew G Biggs states that U.S. ‘Retirement Crisis’ is just a “Media Myth.”
So is there a retirement crisis or not? I believe that the conclusion then, and still is: “Yes” there is a still retirement crisis, it’s not a myth.
Savings Based on rules of thumb to combat the retirement crisis
An often-cited savings rule of thumb is 10%. I don’t like rules of thumb because you don’t know who came up with it and what assumptions they made. Namely, how much money are you trying to accumulate? Will you be withdrawing funds from the account and if so, for how long and how much?
The government currently allows a maximum of $17500 of deferrals if you are in a 401k or 403b. Using the 10% rule, that allows someone that makes $175,000 to sock away 10% in tax-advantaged money. The estimated 50% not covered by a plan only benefits up to $5500. If you make more than $55,000 you would have to save more in a non-tax advantaged account than those who have a 401(k) plan.
Employer-Sponsored (401k and 403b) vs. IRA
Too many people focus on the company match regarding the benefit of a 401k. You should focus on how much you need to save. The IRA for 2014 limits tax-advantaged savings to $5500 and a $1000 catch-up for those over 50. A 401(k) or 403(b) allow you to save $17,500 plus $5500 if you are over 50. If you need to save $10,000 you are maxed out with an IRA but not with a 401(k). The 403(b) rules have some additional wrinkles so I suggest talking with an advisor. Furthermore, if you are a highly compensated employee you may not be able to save into a Roth IRA. There is no phase-out if you save into a Roth 401(k).
Retirement Savings Match
Are you saving based on your company match alone? If you are, you may have been told that the match give you a 100% return on your money. While I understand that logic, it should be viewed in terms of increasing your savings rate and not an investment return. It is not realistic to believe that you will consistently get 100% on any investment you make that has NO risk.
Let’s examine “match.” You may get a 3% match on a 3% contribution. You may get a ¼% match on your 1%. You may get a 7% match on 5%. This illustrates that all matches aren’t equal. However, are your future matches guaranteed? What if the company cuts back on the match due to hard times? Are there any strings with that money, such as working for your current employer for a certain number of years?
The Peril of Delaying is a key part of the Retirement Crisis
Let’s say you want to retire at age 65 and want to live off of 80% of your pre-retirement income of $80,000. The National Savings Rate Guidelines for Individuals3 provides this guidance on the percentage of your salary you need to save:
- At age 25 you would need to save 11.2%
- At age 45 you would need to save 24.0%
- At age 55 you would need to save 36.6%
In every case, that is more than the 10% rule of thumb so often cited. It is also in excess of what an IRA allows.
Fine Tune Your Retirement Savings Target
As rules of thumb can be misleading you should run your own numbers to fit your goals. I recommend working with a CERTIFIED PROFESSIONAL PLANNER OR Chartered Retirement Planning Counselor SM with access to planning software like eMoney Advisor or WealthVision. You have seen the importance of sooner than later. This planner should be able to act as a budget coach to help you make the right trade-offs to get you on track. Working with a professional also provides an accountability partner to help you stay on course.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
1 Putnam Investments, May 2012 » White paper, Dominant variables: Keys to success in defined contribution savings, Edmund F. Murphy III
2 Is there really a retirement savings crisis? An NRRI Analysis, The Center for Retirement Research at Boston College
3 Director, Defined Contribution Services, FPA Journal – National Savings Rate Guidelines for Individuals, by Roger Ibbotson, Ph.D.; James Xiong, Ph.D., CFA; Robert P. Kreitler, CFP®; Charles F. Kreitler; and Peng Chen, Ph.D., CFA