Most Americans realize they aren't saving enough for retirement. According to the nonprofit Employee Benefit Research Group, about 1 in 4 workers describe themselves as "not at all confident" about retirement. A study by 401k.org shows that on average, Americans with 401(k)s contribute between 5.5 and 7 percent of their pre-tax salaries into those accounts--far less than most people need to replace the recommended 80 percent of their working salaries during retirement.
We asked Alicia Munnell, director of Boston College's Center for Retirement Research, to explain just how under-prepared most Americans are for those so-called golden years, and what they can do about it. Excerpts:
In general, are people saving enough for retirement?
They are not saving enough. They are going to find out that they have totally inadequate amounts once they stop working. People need to change how much they are saving, when they start saving, and when then retire. If they don't change, people will not be able to maintain their pre-retirement standard of living. For higher-income people, that will be a disappointment. For lower-income people, it will mean trading off food and medication.
Who is most vulnerable, financially-speaking?
People without any retirement plan other than Social Security are more vulnerable than those who implement a plan with pensions and savings. By the time they get to retirement, about two-thirds of people have picked up some retirement savings along the way, and one-third is totally depending on Social Security.
Given those numbers, are huge portions of the population going to face poverty in retirement?
I would like to think the United States is nimble enough to respond to problems. Right now, we're diverted by wars, the financial crisis, and huge budget deficits, but we really need to change our retirement income system. I think we need a new tier of retirement savings, between Social Security and 401(k) plans--defined contribution arrangement of some sort that provides a replacement income of about 20 percent. The federal government has to initiate it, but it can be managed by the private sector.
In the meantime, what can individuals do to prepare themselves financially?
We wrote a brief that highlighted how important it is to start saving early, and more importantly, how sensitive the required savings rate is to the age at which you retire. Working longer is the major prescription that I could offer. If people could work until they're 70, they would have a much higher chance of having a secure retirement. Social Security is higher if you wait until age 70, and it gives your 401(k) assets a longer chance to grow, and it reduces the number of years you have to support yourself.
It turns out, the rate of return is not as important compared to the starting and ending age (for working and saving). We've been talking about working longer for a long time, but this exercise confirmed it. Putting 9 percent into 401(k) plans is grossly inadequate. We got lulled into thinking that's adequate, but it's really not at all.
What is adequate?
It really depends on when you start and when you finish [working]. With a 4 percent rate of return, if you start saving at age 35 and retire at age 67, then you need to save 18 percent of your income. That's after taking Social Security into account.
Should we still put our savings into the stock market?
It hasn't returned much, if anything, over the last decade. Zero is really discouraging. The stock market is where it was in 1998, and zero is really bad. It depends how old you are. Personally, I panicked about six weeks ago, but I'm older, so I can't afford to lose. My colleague in his 40s is all in stocks, and he really hasn't made any money in the last 10 years but the hope is still there. It's a time for prayer.
What else can we do to save more?
My current idea is that we're putting a lot of money into our housing now. Housing is expensive and we pay big property taxes. If I were starting my life over again, I'd ask, "Do I really need all that house?" We have a lot of square footage compared to people in other countries and houses are very expensive to operate. I might buy a smaller house. Then put that money into something else--a little on Paris, a little into savings.
Housing isn't something where you make great returns. Just owning and operating such a large enterprise really drains you. For a long while, I've been advocating reverse mortgages or other ways of getting your money out of housing, but those just seem so difficult, so now I'm thinking, we shouldn't be putting money in [a house] in the first place.
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