The so-called crisis among current and soon-to-be retirees is front and center in the news right now, but the lack of long-term planning among middle-aged workers may be just as serious. According to the Bureau of Labor Statistics, less than half of the private sector workforce is contributing to a retirement plan, and only 53 percent of all civilian workers are funding employer-provided defined benefits and contribution plans.
Still, the relative savings rates among full-time employees, particularly those working for large companies and earning high incomes, may not have changed much in the past few years. 64 percent of full-time civilians are participating, and that figure climbs to 79 percent for both top 25 percent earners and workers at companies with 500 or more employees.
The real problem may be the rising cost of retirement. “I don't actually think the biggest crisis facing Baby Boomers is that they're not contributing to 401k plans,” said David Bach, Edelman Financial Services Vice Chairman. “The savings rate isn't really different from what it's been the last 10 or 20 years, but what has changed is that people are living longer. Boomers have, on average, about a third of what they need.” There are plenty of six-figure retirement accounts among the top percentile of Boomers, according to Bach, but roughly a third have less than a thousand stashed away, and the median savings is only about $50,000.
Overall, it seems people simply aren't used to prioritizing saving enough to provide for decades-long retirements. “It used to be that your little bit of savings lasted you the rest of your life because that was just 10 to 15 years,” said Bach. “The issue of retirement planning is truly a modern day phenomenon.” At a time when retirees are commonly living into their 90s, working longer will likely become commonplace, and the average retirement age—regardless of changes to Social Security—could drastically increase.
Fortunately, much of the next generation of retirees is already making enough money to save for retirement, and working longer won't be the only way for them to maintain their living standards. According to Bach, the first step for many workers is to re-prioritize and start putting far greater portions of their paychecks towards defined contribution plans. “The average Boomer should be saving a minimum of 15 percent of their gross income, and they should seriously strive to max out their 401k plans,” he said. “That one decision when signing up for 401k plans—often made in less than five minutes—is a huge determinant of how much people save, and it leads to totally different retirement experiences.”
Employer-provided 401ks and other tax-deferred plans aren't always the best options, though. “Fees on these plans can be three to five percent per year, whether you make money or lose money, and that adds up,” said Bruce Elfenbein, Seeman Holtz Senior Advisor. “Your selections of what you can invest in may also be limited. I tell people to contribute up to what their employer will match, since that's essentially your employer paying your future taxes for you.”
Elfenbein and many other retirement experts instead recommend overfunded life insurance policies. “There's nothing that outperforms it if you still have 10 to 15 years to contribute, you can get in the neighborhood of eight percent compounded interest, and structured properly, it comes out tax-free,” he said. As for the lack of tax-deferment on contributions, he refers to the farmer analogy. “Would you rather pay taxes on a little bit of 'seed,' or on thousands of dollars of 'harvest?'”
No matter what types of plans clients choose, conservative rates of withdrawal will be crucial for long retirements. “Some Boomers are taking ten plus percent of their nest eggs per year,” said Bach. “I tell most clients to follow the four percent rule to make their portfolios last 20 to 30 years.” Ten percent may have been a common withdrawal rate at a time when the market was perceived as more dependable – and when retirements were far shorter – but a more conservative approach is now key.
Finally, a long-term working relationship with clients is one of the best ways to ensure they're planning properly throughout their careers. “If you look at the common denominator among Baby Boomers who have wealth, they have financial advisors with whom they've worked over long periods of time,” said Bach. With the help of their advisors, these clients not only create retirement plans, but lifelong financial plans for wealth accumulation, investment and distribution.