Most households in the United States find retirement planning a daunting challenge, with good reason. Rising life expectancy and potentially exorbitant long-term care costs have increased the financial resources required to support oneself and one’s spouse in retirement and old age. For many segments of the population, negligible real wage growth has made the challenge all the more difficult. Furthermore, there are multiple dimensions of uncertainty when it comes to planning for those years, including returns on investments, health, longevity, Social Security benefits, and the level and type of support available from family members. Even with substantial planning, unanticipated events such as losing a job near retirement age, developing a serious illness, or the early death of a spouse can put pressure on even the most well-planned retirement portfolios.
Achieving financial well-being in retirement requires difficult choices and trade-offs long before retirement age. Individuals need to make decisions about how much to spend and how much to save. It is difficult to weigh the benefits of saving for retirement against day-to-day expenses, paying for a child’s college education, saving for a small business, or spending money on pleasures like vacations and eating out. But aside from the decision about how much to save, individuals face a complicated set of choices about how to save. It is challenging to figure out how best to allocate assets across various types of retirement accounts, such as 401(k) plans and the various types of individual retirement accounts (IRAs). Annuities and other insurance products are complex and require a degree of financial sophistication to understand and successfully navigate.
Individuals and households are facing these challenges against a backdrop of stagnant real wage growth and fiscally strained public sector programs. With the aging of the baby boom generation and rising life expectancy, the number of retirees receiving public support has increased markedly, putting fiscal pressures on the Social Security, Medicare, and Medicaid programs. At the same time, health-care costs for seniors continue to rise. Taken together, demographic changes, gains in longevity, and higher medical costs mean that a large and increasing share of our nation’s resources is devoted to supporting the elderly. Absent a dramatic change in policy, the public costs of providing care for seniors will rise. This growth presents additional public sector challenges, which, if unmet, will create uncertainty about how much individuals can reasonably expect to rely on these programs to support them in their retirement years. A founding principle of The Hamilton Project’s economic strategy is that individual economic security is a cornerstone of our nation’s long-term prosperity. Achieving financial wellbeing in retirement is an important component of that goal. In that spirit we offer this framing document to bring attention to trends in Americans’ financial security and preparedness for retirement.
Chapter 1: The Challenges of Preparing for Retirement
- Only half of nonretired American adults expect to have enough money to live comfortably in retirement.
- Americans are living longer: More than three out of five 65-year-olds today will reach age 80, a marked increase from 50 years ago.
- Around one-half of American seniors will pay out-of-pocket expenses for long-term services and supports, such as nursing home facilities or home-based health care.
Chapter 2: How Americans Save
- In 1978 two-thirds of dedicated retirement assets were held in traditional pensions; by contrast, only one-third are today.
- Middle-class households near retirement age have about as much wealth in their homes as they do in their retirement accounts.
- Among households near retirement age, those in the top half of the net worth distribution had more wealth in 2013 than their counterparts did in 1989, while those in the bottom half had less wealth.
- Home equity is a very important source of net worth to all but the wealthiest households near retirement age.
Chapter 3: Challenges for the Future
- Basic financial concepts are not well understood by many Americans.
- The ratio of current workers to current Social Security beneficiaries is half what it was in 1960.
- Federal tax breaks to incentivize retirement saving totaled nearly $100 billion in 2014.