Since the 2008 recession, study after study has confirmed our greatest fear: most of us will never be able to afford to retire. Older workers simply lost too much ground during the economic downturn and have too little time to recover. And younger workers have all the time in the world but no one can seem to convince them to start saving — and investing — enough to make it count.
We’re all doomed! … Or are we?
At least one person is ready to cast doubt on the idea that retirement in America is spiraling toward its inevitable demise. In a recent study published by risk management firm Towers Watson, Sylvester Schieber, retirement researcher and former chair of the Social Security Advisory Board, challenges studies that take a broad-based view of American workers’ overall retirement outlook.
Unlike a truly personalized retirement plan that a financial planner might create for an individual or couple, he argues that generalized studies like these often wind up exaggerating the needs of retirees because they don’t adequately account for the ebbs and flows of spending, earning and saving over a person’s lifetime.
Here are a few reasons why Schieber says things may not be as bad as they seem:
1. You can’t underestimate workers’ ability to save more later in life.
One of the biggest issues Schieber and Pang cite with retirement readiness studies is that they overstate the significance of low savings rates in mid-career workers. Millennial and Gen Y workers almost always turn up at the low-end of savings rates in the U.S. and they’re generally the ones who get the most finger-wagging financial advice.
Schieber argues that these studies don’t sufficiently account for the “life-cycle” effect. Workers typically earn less and consume more in their early working years, especially if they are raising a family and managing financial obligations like student debt. That likely changes over time.
“To start out with an assumption that people start saving 10% or less at age 25, and they do that day in and day out throughout their career, can lead you to conclude that people are under-saving without taking into account that they can accelerate their saving [over time],” he says.
For example, a 22-year-old earning $30,000 might save 5% of his pay to start with and increase his 401(k) contributions to 10% by the time he’s 35 and has gotten a promotion or two. On the flip-side, a 35-year-old who has been saving 10% since his 20s may decrease his contributions when he has a child or buys a new house. Once his kid leaves the nest, or even sooner, there’s a chance he would start accelerating his savings again. These are the sorts of peaks and valleys that some studies don’t take into account when they gauge retiree preparedness, Schieber argues.
Schieber doesn’t deny the advantages of saving as early as possible (compound interest and time are without doubt the best allies a young saver has). But he stopped short of buying into the idea that millennials and Gen Xers are headed to the poor house because they can’t afford to save 15% from the start.
2. It’s easy to overestimate how much income people need to replace in retirement.
The point of saving for retirement is to build a big enough nest egg to sustain the same quality of life workers enjoyed before they retired. But Schieber says it’s shortsighted to simply look at preretirement income as a whole and assume you’ll need that much in retirement — in fact, you could wind up saving a lot more than you actually need.
It all goes back to taking the life-cycle approach to planning. For many workers, much of their preretirement income was spent on things that typically don’t exist in retirement, such as payroll taxes, child care and work-related expenses like commuting.
“If you want to maintain your standard of living, you need to replace the net amount of your preretirement income after [taking away] all of your work-related expenses,” he says.
3. We’re only getting part of the retirement income story.
Much of the concern about retirees’ savings shortfall and over-dependence on Social Security stems from the U.S. Census Bureau's Current Population Survey (CPS), which is what the Social Security Administration uses to come up with its own estimates of retirement income use.
But the CPS’s calculations don’t take into account all the money workers have stashed in their 401(k) or IRA plans. Schieber argues it also underestimates the number of Americans saving for retirement through employer-provided plans.
In a Wall Street Journal editorial earlier this year, Schieber tackles the discrepancy, pointing out that the CPS’ definition of income on includes payments made on a regular, periodic basis. That means monthly benefits paid from a defined benefit pension or an annuity are counted as income, but as-needed withdrawals from 401(k)s or IRAs aren’t.
As an example of the disconnect between the Census data and American workers’ reported retirement savings, Schieber cites 2008 figures from the CPS that show retirees had $5.6 billion in individual IRA income. But retirees reported $111 billion in IRA income the same year, according to the Internal Revenue Service.
The CPS is also based on responses from workers, half of whom said in 2011 that they were offered a retirement plan at work. But a 2011 study by the Social Security Administration found more than 70% of workers in private businesses had access to plans, including 84% of employees at large companies (100 employees or more). Schieber’s main gripe about the CPS data is that it may be offering a partial picture of how much income people have to draw on in retirement.
So, are we in a crisis or not?
The danger of exaggerating retirement needs isn’t necessarily that retirees will wind up with more cash than needed — anything can happen, and at the rate that health care costs are rising now, it’s a best-case scenario for people to arrive at retirement with a little extra cushion to lean on. Schieber’s concern is that when studies come up with ballpark savings goals, they could seem so unattainable to workers that they simply give up trying.
“There’s nothing in our paper that suggests we should not be concerned about what people are saving,” he says. “But let’s be reasonable about what we’re telling them.”
Schieber’s view isn’t without its critics, however. Eric Kingson, co-founder of Social Security Works, an advocacy group that supports an expansion of Social Security benefits, calls it a “distortion of facts.” He cites a December report by Boston College’s Center for Retirement Research that found more than half of American households are at risk of not saving enough for retirement.
“The near-collapse of the economy has really affected people, college costs are going up and healthcare is going up. I don’t know how you reach a conclusion that there’s not a retirement crisis,” Kingson says.
But Schieber isn’t alone in his view about the limitations of research.
“There is certainly a bias [in the financial services industry] to make the retirement savings shortfall appear to be very dire,” says George Papadopoulos, a fee-only financial advisor in Novi, Mich. The more people save, the more financial firms stand to gain.
The challenge is deciding “how far to go to scare them to save more versus how easy to take it to ensure they do not get discouraged and depressed but nudged gently to save more,” he says.
Laura Scharr-Bykowsky, a principal at Ascend Financial Planning, in Columbia, S.C., says the best thing workers can do is work on a plan that is customized to their personal needs.
“Retirement planning is extremely customized and no quick rules of thumb should be adopted as religion,” she says. “I think that science of retirement planning is just now being explored. I tell my clients that a retirement plan is like a fingerprint. Each projection is as unique as the client that walks in the door.”
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