Today’s Americans May Be Worse Off in Retirement Than Their ParentsTrevor Gerszt
One of the greatest benefits of the post-World War II economic boom was that many workers became so well off that they could retire comfortably once they reached their golden years. The days of living paycheck to paycheck and having to work into old age until no one would keep you employed ceased to become a reality for millions of Americans. Freed from having to eke out a living into old age, Americans now readily embrace the dream of retirement.
That dream of retirement became entrenched in the American mindset and continues to remain the ideal today. But for many Americans that dream is far harder to achieve today than it was for previous generations. Those who expect to retire in the coming years may not be able to enjoy retirements as comfortable as those their parents enjoyed.
No Social Security
Hopefully, you never planned on being dependent on Social Security to fund your retirement. The program was never intended to replace retirement savings, only to supplement them, yet many people still plan on depending on that government assistance to help them out in retirement.
The latest Social Security Trustees’ Report indicates that the Social Security trust funds will be depleted by 2034, just 17 years from now. That date keeps getting revised closer and closer, so don’t be surprised if by 2020 that estimated depletion date has been moved up to 2030.
After that depletion date, Social Security payments will be dependent on tax revenues. The estimated receipts from Social Security taxes are only expected to be able to pay about 75 percent of estimated Social Security benefits through 2091. That means that unless Social Security taxes are raised, you can’t expect to get the entirety of the Social Security benefits you might be expecting.
No Pension Plan
Many of our parents retired with generous pensions plans. Whether they were private sector plans from large corporations, or government plans such as the Civil Service Retirement System, the defined benefit pension plans of old were not only generous in their payments, but they also allowed retirees to expect a certain defined payment every year, thus taking much of the guesswork out of retirement planning.
Rising costs and the difficulty of administering those programs made it much harder for companies to offer pension plans. Combined with the creation of 401(k) retirement accounts, that spurred companies to offload the responsibility for retirement planning onto their employees.
Pension plans today are by and large limited to some large legacy corporations, as well as government entities. But those pension plans are often underfunded, some severely. Workers who expect to receive a pension when they retire may be in for a nasty surprise when they find out that their pension plan doesn’t have enough money to pay out their benefits.
Dependent on Self
That means that workers today are responsible for their own retirement savings in a way that their parents weren’t. They cannot expect their employer or the government to provide for them because if they do they might find themselves without enough money to live on in retirement. Being able to retire comfortably in the coming decades will require a combination both of regular savings, but also of smart and savvy investing.
Wealth to Income Ratio
To figure out how on track you are when it comes to retirement savings, it can help to look at your wealth to income ratio. Your wealth includes all your financial assets, retirement account balances, and any real estate you may own, minus any debt you owe such as credit card debt, student loans, or mortgage balances. Income includes any salary you are earning, retirement payments, and returns on financial investments.
By the time Americans are in their early 30s their wealth to income ratio is generally about 1:1 – meaning that their pre-tax income is roughly the same as the amount of wealth they’ve accumulated. By the time they reach their early 60s, the average household has about a 4:1 wealth to income ratio, which means their accumulated financial assets are equal to four times their annual income. So for a household that brings in $125,000 per year, that would mean $500,000 in financial assets.
Remember, that’s just the average, and that average has been falling in recent years. To a large extent that’s the result of the financial crisis, which decimated retirement savings. While the stock market boom of the past two years has added a lot of on-paper wealth to retirement accounts, even the stratospheric rise in asset prices hasn’t undone the damage done by the combination of a crashing stock market and years of subpar financial returns. Many workers are still just now seeing their retirement accounts getting back to the on-trend levels they would have expected to see by now had the financial crisis never occurred.
Because wealth to income ratios continue to decrease, it’s more important than ever for investors to shoot for ratios that are higher than average. $500,000 in assets may sound like a lot, but figure that those assets will have to last you for 10, 20, or even 30 years of not working. Will those assets continue to work for you, allowing you to maintain an even and comfortable standard of living in retirement?
Special: IRA, 401(k) & TSP Scam
It’s important for investors to make sure that their investments don’t stop working for them in retirement. That’s why so many investors choose gold and precious metals to safeguard their retirement savings as they approach retirement. Not only is gold less volatile in its price movements than stocks and bonds, but it also has outperformed stock markets over the past 45 years. And with the ease of establishing a gold IRA, investing in gold is easier than ever. If you think you have enough money saved up to retire on, and you want to protect those savings and keep them working for you in retirement, you owe it to yourself to look into investing in gold.