Like you, I read as many articles related to pensions, retirement, and savings as I can. As our retirement industry has moved from defined benefit pensions where the monthly benefit is explicit, to a defined contribution plan where the payout is anyone’s guess, more and more articles have appeared proclaiming a certain $ threshold is necessary in order to achieve a “dignified” retirement. According to a recent Schwab survey, the average worker “expects” to need roughly $1.9 million to retire comfortably. For Millennials and Generation X, the number is $2 million, while Baby Boom generation members need about $1.6 million. Really? This expectation is based on what?
For many Americans, the dream of accumulating $1 million in a retirement account was considered to be enough to bring you to the promised land of a quality retirement. In years past, and really not too long ago, a $1 million retirement balance could produce a $50,000 annual income through a combination of bond interest and stock dividends. That in combination with a Social Security average monthly payout ($1,461 in 2019) and you could have a retirement that allows you to stay in your home while still being able to meet future expenditures related to aging.
Regrettably, the Federal Reserve policy action of the last several years has made the $1 million account target basically useless. In an environment where the Bloomberg Barclays Aggregate Index is yielding only 1.04% (6/30/20), it would take nearly $5 million to produce the same $50,000 that $1 million used to generate. Given that the average retirement account balance is a mere fraction of the original goal, most Americans will NEVER achieve the dignified retirement that they desire.
As a result of those plunging US interest rates, retirees are forced to stretch for yield through investments that they don’t understand and can’t afford to see fail, as they have little recourse to make up for a substantial hit to their principal balance. It truly is shameful what we’ve done to retirees and near-retirees.
The loss of DB pension incomes in the private sector will create an economic drag that will become exacerbated when many of those age 50 and up are forced into early retirement through the economic disruption caused by the Covid-19 crisis, which has disproportionately impacted lower wage earners. In fact, I recently read that American workers making $40,000 or less had a 40% chance of losing their job in the last 4 months! Anyone think that they are in a position to fund a retirement program?
The creation of an on-call workforce has further destabilized the promise of a meaningful retirement, as most of those employment opportunities don’t come with benefits. As we all know, Americans don’t save outside of an employer-sponsored retirement program. Do you really think that there isn’t a retirement crisis, as some in our industry would have you believe?