Is There a Retirement Savings Crisis?
Tim Randak, MSF, CFA®, CFP®
One of the more common questions I receive is, “How much do I need to retire?” Many soon-to-be retirees agonize over their retirement savings. Those not reaching their retirement savings goal must work longer or accept a lower standard of living during retirement. Retirement studies suggest many American workers are unprepared for the financial demands of retirement. A report from the National Institute on Retirement Security (NIRS)(1) found that retirement savings accounts for only 24 percent of total financial assets for adults ages 30-64. Further, 52 percent of retirement income for older Americans is from Social Security.
One reason retirees are less prepared for retirement is defined benefit plans (traditional pension plans) are becoming less common. The NIRS Report found that only 17 percent of workers are participating in a defined benefit plan. No longer does the burden of retirement savings fall on the employer. The responsibility lies with the employee. Individuals must save for retirement using defined contribution plans (401k, 403b, IRA, etc.).
Failing to plan for the costs of health care is another reason many are unprepared for retirement. The U.S. Department of the Actuary projects annual health care costs will grow at 5.8% over the next decade. That is in line with the growth in health care costs over the past fifty years. Few employers offer health insurance coverage to retirees. Most individuals and couples rely on Medicare. According to Fidelity’s 2024 Retiree Health Care Cost Estimates(2), a couple retiring at age 65 will spend an average of $330,000 on retirement health care.
Not only is the cost of retirement growing, so is the length of retirement. People are living longer. A woman turning 65 today can expect to live, on average, until 85.1 (82.5 for a man). About one out of three 65-year-olds will live past age 90, and one out of seven will live past age 95 (Social Security Administration).
We face an environment where individuals bear a greater amount of the responsibility to save, the cost of retirement is increasing, and the duration of retirement is longer. Saving for retirement is more challenging. Often making matters worse, many individuals and couples underestimate their needs for a comfortable retirement by using oversimplified rules or retirement calculators. With retirement planning, there is no one-size-fits-all answer.
To avoid being among those not reaching their retirement savings goal, a thorough retirement strategy should be in place. It should consider, among other things, your current retirement savings, your unique financial and lifestyle goals, the cost of your retirement lifestyle, the number of years until retirement, the length of retirement, and your tolerance for risk. Comprehensive retirement planning helps answer the question, “How much do I need to retire?” Your “magic number” is unique to you.
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