I just had a birthday. I won’t give you my age, but here’s a big clue: I’m now one year away from Medicare. Each year the age gap between me and my students widens. I like to think I bring experience and wisdom to share with them. But I know many of them think I’m an ancient relic.
And speaking of ancient, retirement is probably the last thing on my students’ minds. Understandably, their focus – at least I hope – is on completing their education and landing a good job.
Still, with my generation – the “baby boomers” – increasingly moving into retirement, some experts say many retirees will be disappointed. The experts say we are seeing the beginning of a “retirement crisis” that will only grow in the decades ahead.
Now I know the word “crisis” is often over-used, so let me try to be clearer about the problem. Here it is in a nutshell: More people are moving into retirement, and these folks will spend more years as retired. Therefore, the collective money needed by retirees is increasing – and will continue to increase. Yet the amount of money are available for retirees is not keeping up. Therefore, the problem – or crisis if you like – is that the gap between what retirees need and what they have available is widening.
Let me give you some numbers. As a result of increasing life expectancies, the average person will now spend 20 years in retirement, and that number is expected to rise to 22 years in a few decades. In contrast, in the 1960s, the average person was retired for only 13 years. So retirees will need more money to cover a longer period of their “golden years.”
Yet the big question is where that money will come from. The support from Social Security appears to be shrinking. Before adjusting for taxes and fees, Social Security replaced 42 percent of the average 65-year-old’s annual earnings in 1985; by 2030, that replacement rate is expected to fall to 36 percent. On top of this, the workforce paying into Social Security is shrinking relative to the number of retirees receiving Social Security.
Less than half of workers take part in a company pension. Also, the funds individuals nearing retirement have in personal retirement accounts, like individual retirement accounts and 401(k) plans, are relatively meager, averaging $100,000 for all workers and $13,000 for those earning under $40,000. These funds won’t go far when spread out over a 20-year retirement period.
As a result of these conditions, the Center for Retirement Research estimates that more than 50 percent of working-age households today will not have enough money available at retirement to maintain their pre-retirement standard of living.
So what are the options? There are really four: retire later, save more, accept a lower retirement standard of living or find additional government resources to bolster Social Security.
Working longer has three benefits: Social Security retirement checks will be greater, saving is easier, and retirees will need to finance fewer golden years. Plus, as the relative size of the traditional working-age population has shrunk, companies might be more willing to hire and keep older workers. Of course, the downside is less leisure time in retirement, and for those with physical issues, work might not be possible.
It’s easy to say “save more,” but often this is hard. Many households have trouble stretching their paychecks to meet all necessities, so they have no room to save. Still, budgeting techniques can reduce spending, like buying in bulk and buying at remnant and second-hand stores. Some financial advisers also recommend retired households owning a home access their home equity for money; however, retirees should make that move cautiously and with much analysis.
Living on less and living more frugally in retirement is always an option. Indeed, one of my grandfathers rotated living with each of his daughters (one of them my mother) when he retired. Yet this isn’t what modern retirees expect. Today’s workers often look to retirement as a fun time to enjoy hobbies, play with grandchildren and maybe travel. Retirement is a time to relish, not dread.
The last option is to bulk-up Social Security by putting more money into the system so more can be paid to retirees. Interestingly, those favoring this option are not necessarily recommending increasing the payroll tax to strengthen Social Security. Instead, they want to use general tax revenues – specifically from the federal individual and corporate income taxes – to improve the financial capacity of the program.
When I discuss retirement with my students, many of them take their minds elsewhere, because, for them, it’s so far away. But for an increasing number of us, it’s here or around the corner. How well we will do in retirement is something individually – and collectively – we’ll decide.
Dr. Mike Walden is a professor and N.C. Cooperative Extension economist in the Department of Agricultural and Resource Economics at N.C. State University.