Here are seven things that everybody should know about the crisis, pulled from the report and elsewhere.
1) Americans are running a huge deficit
Harkin’s report suggests that the retirement crisis is “directly attributable to the breakdown of the traditional ‘three-legged stool’ of retirement security – pensions, savings, and Social Security.” All three of these legs have been eroded in some way by the financial crisis and global economic downturn. Institutions with defined benefit pension plans such as large corporations or municipal governments are having an increasingly difficult time meeting their obligations. Meanwhile, stagnant wages and a rising cost of living have made it more difficult for people to contribute to a 401K or an IRA.
Harkin’s report points out that, in aggregate, Americans currently hold a $6.6 trillion retirement deficit. Only one of five people in the private sector workforce have a defined benefit pension plan, and half of Americans have less than $10,000 in savings.
2) Social Security is in danger
The Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds recently delivered its 2013 annual report to Congress. The report was intended to inform Congress about the current state of the Old-Age, Survivors, and Disability Insurance (“OASDI”) and the Disability Insurance (“DI”) programs and projects forward to the best of its abilities the health of these programs in the future. These programs fall under the umbrella of Social Security.
“Beginning in 2021,” reads the report, “annual cost exceeds total income, and therefore reserves begin to decline… The dollar level of the combined trust fund reserves declines beginning in 2021 until reserves are depleted in 2033.”
The report explained why: “The projected OASDI annual cost rate increases from 13.95 percent of taxable payroll for 2013 to 16.98 percent for 2035 and to 18.01 percent for 2087, a level that is 4.77 percent of taxable payroll more than the projected income rate for 2087.” In short, unless taxes are increased or spending is cut, the OASDI program will not be able to satisfy its obligations.
3) Social Security alone is not enough
Social Security is intended to complement, not replace, individual retirement planning. Unfortunately, reports indicate that 53 percent of married couples and 74 percent of unmarried retirees receive at least 50 percent of their income from Social Security while nearly 25 percent of married couples and nearly 50 percent of unmarried retirees rely on Social Security for 90 percent of income.
Part of the reason Social Security has become such an essential part of retirement for so many people is that in aggregate Americans have failed to save enough. Even for those who have though, record low interest rates and uncertain market conditions have created an environment where a problematically high number of retirees risk draining their portfolio.
4) .. but Social Security may be the best fixed income you’ll ever get
John Bogle is no doubt one of the best investment managers on the planet. He founded The Vanguard Group, which manages approximately $2 trillion in assets, and is credited with the creation of the first index fund available to individual investors. In many ways, Bogle has defined what long-term investing looks like for the average person.
Despite the fact that Social Security may not be around for much longer, Bogle has suggested that “Social Security’s the greatest fixed income you’ll ever get… We’re all so transfixed with the movements of the stock market, but that has nothing to do with your retirement. It doesn’t matter what the stock market is worth as long as the income keeps coming from dividends. In the long run, focus on the dividend stream, and focus on the fact that Social Security will keep coming.”
Bogle may assume that Washington will get its act together and figure out how to fix the system before it breaks.
5) Crashes hurt, but stocks are still your friend
The 2008 financial crisis forced a small minority of people saving for retirement out of equities and into safer but slower-growing investments like bonds. Unfortunately, those who left the markets in the wake of the crisis have lost out on what can only be considered a historic run.
“There is a valuable lesson to be learned from the minority of pre-retirees who abandoned equities altogether and experienced significantly less progress,” James M. MacDonald, president of Workplace Investing at Fidelity Investments, told the AARP. “It’s important to continually remind employees that sticking to [their] savings philosophy may not always reward in the short-term but may over the long-term.”
According to the AARP, the average balance of a 401K plan for those older than 55 has doubled since 2009 to $255,000. The analysis, conducted by Fidelity Investments, included 12 million participants and found that the majority of the gains can be attributed to increases in the value of stocks. This compares to an increase of just 25.9 percent in the 401K plans for those who got out of equities in 2008 and 2009 and have not rebalanced since.
6) Bonds may not be the safe haven they once were
An analysis done by Alliance Bertstein for the New York Times showed that thanks to record low interest rates, even retirees with a portfolio of $1 million — something only 1 in 10 have access to — invested in bonds have a 72 percent chance of running out of money before they die. This, of course, turns the traditional advice of investing more heavily in bonds as you near retirement on its head.
7) There are options
One increasingly popular option is to continue working. There are a number of serious proposals that suggest the retirement age should be increased anyways, and surveys show that more and more Americans see themselves working during retirement either out of necessity or out of a desire to stay active. There are a few clear financial and social advantages to this option. Not only will whatever income you are earning from your portfolio and Social Security be augmented, but you remain a participant in the economy.
Underwhelmed by the survey of options listed above, a growing number of retirees have taken the idea of working through retirement one step further. They’ve decided to take their savings and use it to buy a business.
Owning and operating a business after a long career may not be some people’s idea of an ideal retirement, but for others there are only so many cocktails to be had on so many beaches. As Meg Schmitz, an independent franchise consultant, would ask people considering what to do with their golden years: “Does the word ‘retirement’ even resonate with you anymore?”
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