We all know that saving for retirement is important. As a society, we are living longer than we expected, and this sometimes means that we did not save enough during our working years. Living longer lives is of course a wonderful thing, but it also means that nearly everyone has an opinion on how much to save, through what vehicles, the role of government and more.
There are a lot of perspectives about the possibility of a retirement crisis — the Federal Reserve Bank of St. Louis has noted that “for many American households, the total balances of their retirement accounts may not be sufficient to ensure a solid life in retirement.” So, let’s focus on a few observations that we are seeing in the retirement services industry and what this might mean for the future.
First, the truth is that each generation in America is living longer than the previous one. Yet ever since Social Security was enacted more than 80 years ago, the minimum age for collecting full benefits has only slightly increased (from 65 to 67 for anyone born in 1960 or after). While this does not mean that everyone has to retire at this age, it does serve as a guideline for when people may expect to retire. The thinking used to be that you worked all the way up until the last few years of your life; the common thinking now is to enjoy your retirement lifestyle for a couple of decades.
There’s no reason not to expect this trend to continue, and so it’s worth thinking about how the generations who are in their prime working years are preparing for the years ahead. Is the expectation for a long and enjoyable retirement translating to better savings habits?
Research suggests that it is. When we polled small businesses and employees last year in our inaugural Small Business Retirement Survey, we found that millennials, who now comprise the largest generation in today’s workforce, take retirement benefits very seriously. We found that 91% of millennials surveyed view retirement savings options as an important factor when considering a new employer. Additionally, 95% of this age group wants to be educated on how to manage their retirement savings goals.
While retirement is still a far-off dream for many, millennials in particular realize the importance of saving early. And with good reason. A general rule of thumb is that in order to maintain your current standard of living once in retirement, you’ll need to be able to generate about 70-90% of your current income per year (through dividends, interest or withdrawals). If you are not contributing to a 401(k), IRA, or other qualified retirement savings plan, this is going to be significantly harder to do.
But just because those who are decades away from retirement are actively thinking about the importance of saving doesn’t mean that they will actually have enough saved when they retire. There are many issues that still need to be addressed — such as:
- Helping what we call “missing participants” (those who changed jobs and essentially left behind their retirement balances) reconnect with their savings
- Inspiring people to realize how much they will need and how to maximize the benefits that are currently offered to them, and
- Providing solutions for the growing number of gig economy and small-business workers who often lack access to typical workplace benefits.
The challenges we face now will likely be very different in even just a few years; but addressing these issues now will shape the future for the better.
For example, an important early step is realizing that workplace savings solutions include more than just the ubiquitous 401(k) plan. While recent proposed legislation regarding state-run plans and expanded MEPs has been a step in the right direction, it won’t fill the entire gap. Solutions such as SEP IRAs, SIMPLE IRAs and Payroll Deducted IRAs offer a cost-effective alternative with different levels of flexibility for small employers.
It’s important to remember that while there were around 560,000 401(k) plans in operation as of 2016, there were 5.9 million small businesses with employees in the U.S in 2015. Increased adoption of innovative workplace savings solutions will make a difference in helping more Americans save for retirement, especially when people are 15 times more likely to save for retirement if they have a plan that is offered by their employer.
So, is the retirement crisis affecting our attitudes toward saving? I would say yes, and I support the innovative ideas being considered across the retirement industry. However, helping Americans retire with more money will require a significant shift that aligns with our changing preferences and expectations from employers, government and plan advisors alike.
Gary Anetsberger is the CEO of Millennium Trust Company LLC and has over 40 years of experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.