The Savings Crisis In Retirement Funding

All the recent publicity about the crisis in the Social Security system with people lobbying for and against “Personal Social Security Accounts” has caused more and more of us to wonder about our retirement.

Recent statistics indicating that the savings rate among Americans is at an all-time low have caused even short-term thinking politicians to begin to worry about the social problems arising in the future if something does not change.

It is estimated that 77 million baby boomers will be retiring in the next few years. We all know this will put a strain on Social Security, but it will also strain the private retirement industry.

The actuaries inform us that longevity is increasing and that people perhaps can look to as long a period in retirement as they had to accumulate the funds to support them during that time.

The government indicates that an adequate amount of income for retirement is an amount equal to 75% of earnings during the last years of work.

The government believes the reason for the ability to survive on less income after retirement apparently derives from the savings that will occur due to the end of commuting expenses, purchasing work clothing, restaurant meals eaten out while on the job, and the like.

It’s doubtful that these reduced expenses will, in fact, be enough to cut retirement expenditures by 25%, particularly when considering the increased medical expenses that are a natural byproduct of the aging process. Yet, even if the 75% figure were accurate, it is still difficult for the average person to be able to calculate how much must be accumulated to fund that amount.

Once upon a time, a significant number of us had a great deal more retirement security, because actual monthly pensions were guaranteed by employers. These pensions, combined with savings and Social Security, could be counted on to maintain a lifestyle adequate to personal needs.

Today, few employers offer guaranteed pensions. We are expected to fund the major portion of our own pension plans through IRAs, 401(k) plans or similar defined contribution plans and by private savings. The government seems to believe that, even though there are severe limitations on the amounts of pre-tax dollars that can be contributed to tax-deferred savings plans, the combination of these elements is adequate to enable people to achieve the goal of retirement income equal to 75% of the income earned during the final years of employment.

Government statistics indicate the average per capita income in the U.S. at the end of 2004 was around $32,000. Assuming we are dealing with the retirement of a working couple, this would mean that the average income of that couple would be in the vicinity of $62,000–a number that may, in fact, be high due to the fact that there is often an unfortunate disparity in the income of men and women.