The American dream of a blissful retirement, free of financial worries, is dying.
Most U.S. households are heading for a worse lifestyle in retirement than they had while they were working, because they simply aren’t saving enough, experts say. Thirty-five percent of households in their prime earning years or later have nothing saved in a retirement account and no access to a traditional pension, according to an AP analysis of savings data from the Federal Reserve.
Among households that do have some savings, the typical amount is just $73,200. That’s about 15 months of the median household’s income.
One group doesn’t have to worry as much: the richest 10 percent of households. They typically have more than $413,000 in a retirement account, according to the analysis of the Fed’s latest savings data, which is from 2013.
The rest of us look a lot more like Nancy Harvey, a 54-year-old child-care center owner in Oakland, California, who has less than $2,000 saved despite her decades of work. Her plan for retirement, as of now, is to continue with real-estate classes in hopes that it can provide a second job.
“I have to work and pray and hope my health continues to remain good so that I can continue to work,” she says. “I still have a mortgage and all the insurance that goes along with that, and I have to pay payroll for my employees, which is really important to me. I can honestly say I’m frightened about the future.”
Harvey isn’t alone, as the gap widens between the few households who don’t have to worry about a comfortable retirement and everyone else. The anxiety stretches not only across the country but also across political affiliations. Nearly equivalent percentages of Democrats and Republicans say they’re not managing very well in retirement planning, a recent survey from Lincoln Financial found.
The looming crisis is the result of a system that’s increasingly put workers in charge of saving for and managing their own retirement. Because the U.S. households at the top have reaped most of the income gains over the last decade – and because they have disproportionately more access to retirement plans to begin with – experts say the gap in retirement savings is only growing wider. They’re expecting to see more elderly Americans working longer, moving in with their kids and tapping assistance programs.
“Only the privileged have access to a secure retirement,” says Teresa Ghilarducci, a labor economist at the New School for Social Research.
It’s much easier to save for retirement when you’re making more money, and the vast majority of the income gains have gone only to the top in recent years.
The top 10 percent of U.S. households made more than $162,180 last year. That’s up 6 percent from a decade earlier, after adjusting for inflation.
For middle-income Americans, meanwhile, incomes have only barely stayed ahead of inflation. The typical U.S. household saw just a 0.5 percent increase from 2005 through 2015, to $56,516. Lower-income households are making less than a decade ago.
The benefit of making more money goes beyond having more to save. Higher-income households also get a bigger after-tax benefit from putting money into a 401(k) or another tax-advantaged account, because their contributions would have been taxed at a higher rate than lower-income households’.
And with traditional pensions increasingly becoming extinct, it’s grown even more important for Americans to save. Decades ago, workers could depend on getting a set, monthly check into their golden years. In 1979, 38 percent of private-sector workers were participating in a traditional pension plan.
In ensuing years, employers have shifted instead to the 401(k) and similar plans, where workers make their own contributions and handle the investments themselves. Such plans mean lower costs for employers.
By 2013, only 13 percent of private-sector workers were participating in a traditional pension, and most of those workers were participating in both a pension and a 401(k) or similar program. Nearly all employer-sponsored retirement plans – 94 percent – are 401(k)-style programs instead of traditional pensions.
Meanwhile, Social Security – the last line of defense for many retirement plans – is under pressure. With Baby Boomers increasingly tapping the system, Social Security’s trust funds are projected to run dry by 2034. After that, the system will be pulling in enough revenue to pay out only 79 percent of scheduled benefits, unless Washington makes some changes.
It’s a similar challenge for government pension systems around the world. Many countries have moved their retirement ages up to 67 from 65, and some are looking to move closer to 70, according to the Organization for Economic Cooperation and Development.
Financial shocks, such as a layoff, broken-down car or a divorce, happen to most of us. Six in 10 households experienced one over a 12-month period, according to a recent study by the Pew Charitable Trusts.
But when such shocks happen, lower-income households are less able to weather them without dipping into retirement savings or halting their contributions. Not only does that drain nest eggs, it also means people miss out on future gains their savings would have earned if they’d remained invested in the stock market.
“When you’re out, you can’t buy low” says Anthony Webb, research director of the Retirement Equity Lab at the Schwartz Center for Economic Policy Analysis.
Harvey, the 54-year-old child-care center owner in Oakland, California, knows.
At one point, she had built up a nest egg of between $10,000 and $25,000 in 401(k) accounts through prior jobs she had in accounting and sales. About 15 years ago, she started her own business, which she runs from her home.
“Then, I unfortunately went through a divorce, and life happens,” she says. She pulled cash from her retirement savings to help pay college tuition bills for her kids and for a car. All the while, even as her business grew, her take-home income remained low enough that she periodically lined up for a free turkey during holiday seasons.
“There’s not a whole lot left,” Harvey, a member of the Service Employees International Union, says of her retirement savings. “It’s basically down to nothing.”
Janene Evans, a 53-year-old in Belgrade, Montana, has also missed out on a lot of the stock market’s gains in recent years.
She did have a retirement account at one point, saving about $15,000 while working in the payroll department of an Arizona university. But Evans emptied it after she moved to another state in 1998 and couldn’t find a job that surpassed her $20,000 annual salary or offered retirement benefits. That means she missed out on the S&P 500’s 157 percent return over the last 15 years.
She’s now barely getting by on the $1,085 she gets monthly after going on disability two years ago. She doesn’t know what she will do about retirement.
“I can’t save on $1,000 a month,” she says.