By: Russ Kamp, Managing Director, Ryan ALM, Inc.
I read the WSJ every day and have for most of my 40-year career. My reason for this post has less to do with the Journal than it has the subject matter. I am annoyed! Regular readers of this blog might respond by saying “what else is new, Kamp”! In this particular situation, the WSJ ran an article yesterday that questioned whether or not it was an appropriate time to retire. They mentioned the importance of the first 5 years (sequencing of returns) and the size of the annual distributions (4% rule), which were appropriate. But time after time writers use as an example $1 million in a retirement account. Who are we/they kidding? In the Journal article, the $1 million balance was associated with a 62-year-old who had just retired and they “wondered” whether this individual was going to be able to sustain their spending throughout a 30-year retirement. A dignified retirement – how pleasant!
Here’s my issue, most Americans don’t have access to a DB pension plan – very regrettable. Many Americans (roughly 30%) don’t have access to any employer-sponsored retirement vehicle including a defined contribution plan. For those that have access to one, the median balance according to Vanguard for a 55-64-year-old (as of June 2022) is a whopping $89,716. This is the median balance for participants in 1,700 vanguard plans covering 4.7 million workers. Where are all those millionaires? Remember, the median represents the 50th percentile, which means that 50% of those participants have less than $89,000. Furthermore, it does not include all the American workers who don’t have access to a retirement account.
It would be incredibly wonderful if the median 401(k) participant had $1 million in savings or for that matter net worth, but we know that the median net worth in this country is only $121,411. Why do we continue to play games using thresholds that aren’t close to being realistic? We have a retirement crisis that is only going to get worse, as the newer members of the Baby Boomer generation retire without a DB pension followed by all of the other cohorts. Instead of using the ink on unrealistic examples of retirement readiness, why don’t we invest the necessary time addressing our current failure to adequately prepare the American workforce for life during our golden years? Asking untrained individuals to fund, manage, and then disburse a retirement benefit without the appropriate skills is pure folly.
We don’t need 3 million greeters at Walmart, but that is what we are going to have when too few Americans can retire. Not being able to manage one’s workforce through a natural lifecycle creates another series of complications. The demise of the traditional DB plan is creating this mess! Too few Americans have the financial wherewithal to appropriately fund life after work. Growing burdens associated with housing, childcare, food/energy, education, healthcare, etc. are making it incredibly difficult for the average American to save. I am blessed with five children, who have each gotten wonderful educations and who are currently gainfully employed in good careers. Yet I witness often the struggles that they face trying to juggle the ridiculous cost of childcare, housing, etc. Something has to give! So, please stop showing examples of what retirement looks like with a $1 million balance. Let’s get realistic and highlight the fact that the 4% rule when applied to an $89,000 median account balance will provide the retiree with $3,560 per year. How dignified a retirement will that provide?