If you follow the latest retirement news, it seems the sky is falling. The savings picture for Americans looks bleak. We don’t want to minimize the problems; they really do exist. But, the way things play out for individuals can look very different than how they appear based purely on ratios, projections and estimates.
Here are a few of the statistics that cause concern:
- The National Institute on Retirement Security (NIRS) reports that nearly 40 million, or 45%, of U.S. households haven’t saved a penny toward retirement.
- The Federal Reserve says the median retirement account balance as of 2013 in the United States, among those who have a retirement account, was $59,000.
- Compare that $59,000 figure to the expected need of $250,000+ for retirees just to pay medical expenses.
- In their report, The Continuing Retirement Savings Crisis, NIRS says the median retirement account balance for all working American households, including those without a retirement account, is $2,500. For near-retirement households, the figure is $14,500.
Most American workers who claim Social Security retirement come very close to maintaining their pre-retirement spendable income, according to the report by ICI economists Peter Brady and Steven Bass, along with economists Jessica Holland and Kevin Pierce of the Statistics of Income Division of the IRS.
The research analyzed tax data from 1999 to 2010, comparing it to several additional sources of data. That tactic is in contrast with the standard method of gathering such data, which involves surveying individuals, and according to the ICI, results in greater accuracy.
Encouraging Replacement Ratios
The findings were encouraging, showing that the median worker replaced 103% of spendable income once they claim their Social Security benefits. Most of the people analyzed had an additional source of retirement income, such as pension income or retirement savings in an Individual Retirement Account or 401(k).
“The vast majority of workers we analyzed reported retirement resources other than Social Security,” said Brady. “Indeed, 89% of individuals held or drew income from employer plans, annuities, and IRAs.
“These results suggest that a much higher share of retirees get income from these sources than reported in government surveys, and adds to the mounting evidence that household survey data understate retiree income. By looking at what tax filers, employers, and financial institutions actually report to the IRS, we are able to paint a more accurate picture.”
The ICI report, released in April 2017, looks at spendable income, because that is a consistent measure of an individual’s ability to fund consumption. For this purpose, spendable income includes money from working, Social Security, and retirement benefits of the individual or a spouse. It excludes income that can’t be spent, such as tax payments and retirement contributions.
The research found differences in spendable income replacement percentages based on pre-retirement income brackets. After claiming Social Security benefits:
- The lowest 20% of workers realized an increase in spendable income of 123% of pre-retirement spendable income;
- For those in the middle 20%, the replacement percentage was 103%; and
- People who earned in the top 1% in their pre-retirement years realized the lowest spendable income replacement percentage, at 95% of pre-retirement spendable income.
The differences in replacement percentages is largely due to limits placed on sources of retirement income. Individuals earning substantial working incomes, although they may have the wherewithal to save more money toward retirement, are often unable to do so in a tax-favored account because of legal contribution limits. The result is they may ‘max out’ their retirement funding sources and are then unable to replace the same percentage as their lower-earning colleagues.
Continue Helping Employees Save
Although the ICI report could be considered good news, it does not mean the retirement income problems of working Americans are solved. It also does not mean that companies sponsoring 401(k) or other retirement plans should relax. On the contrary, without these plans the picture could change substantially—and not for the better.
How can you use this information to benefit your employees?
- Continue to educate them about the real cost of retiring, including the health care costs they may face;
- Provide access to quality participant education about financial wellness and investing;
- Include “single choice” options, like target date funds, among investment choices to address the needs of participants who simply won’t engage; and
- Give employees an easy way to keep tabs on their Social Security account, and what they can expect to receive from it.