How to Save for Retirement—and Why Most of Us Haven’t (or Can’t) Save Enough

People say getting old isn’t for the faint of heart. Well, neither is retirement—financially speaking, anyway. Saving is hard. Few jobs offer traditional pensions anymore. A 401(k) puts the burden of financial management largely on the employee. And Social Security is a labyrinth of complex regulations and difficult calculations, administered by a seemingly indifferent bureaucracy. Retirees and those getting ready to retire must navigate all of this at a time of life when they may not be at their strongest, physically, mentally, or emotionally. But they need to be. As the last of the 73 million baby boomers turn 65 in the next seven years, challenges to the system will only increase. “You’re probably going to have an increase in the poverty rate,” says retirement planning evangelist Laurence Kotlikoff, William Fairfield Warren Professor of Economics in the Boston University College of Arts & Sciences. “People are retiring, some quite early, and retiring with very little. Baby boomers just don’t have enough savings. And Social Security is just not gonna be that big for lots of people.” Twenty-seven percent of adults in 2021 considered themselves to be retired, even though some were still working in some capacity, according to the Federal Reserve. Some 92 percent of retirees over the age of 65 collected Social Security, and two-thirds drew from retirement accounts or pensions. A look at the stats covering the number of older people living in poverty seems to provide good news, having declined from one in three people in the 1960s to only about 10 percent of older people today. Still too many, but a big improvement. But within that picture is a cautionary tale, says Deborah Carr, a CAS professor of sociology and director of the Center for Innovation in Social Science. “If you look at just that 10 percent, 3 percent of white married men live in poverty, but over a third of women of color living on their own are in poverty,” Carr says. “So, 10 percent is a good news story overall, but we want to recall that there are some deep pockets of poverty among older people.” Of course, millions of Americans retire just fine, but BU researchers are working to identify the challenges that keep many others from fully enjoying what are supposed to be their golden years.

Conventional Retirement Advice: A “Bait and Switch”

For most people, it all starts with saving, whether in a bank, under a mattress, or, most commonly today, with an individual retirement account. But Kotlikoff says most middle- and working-class people simply don’t save enough. “Even after Social Security contributions, and after 401(k) contributions, they should probably be saving another 15 percent of their take-home pay, which is very tough,” Kotlikoff says, noting that perhaps 40 percent of those eligible for a 401(k) don’t take advantage. “Most people are saving nothing.” Total US personal savings, exclusive of Social Security contributions and 401(k)s, only accounted for 4.1 percent of disposable personal income as of April 2023, according to Forbes Advisor, roughly a third below the 6.2 percent a decade earlier. And Kotlikoff says too much of that money is going in the wrong places. “Everyone who expects to sustain their living standard through retirement needs to do economics-based financial planning,” Kotlikoff says. Where conventional retirement planning involves setting financial and lifestyle goals, then trying to hit them—sometimes through risky investment strategies—he says the economics-based approach is about determining asustainable living standard based on your resources, and adjusting your spending as your circumstances change, so you don’t outlive your savings. “Conventional planning is an elaborate bait and switch designed to sell you investment products that are highly expensive and overly risky,” Kotlikoff says.