How do you pay for something when you don’t know what it’s going to cost or how long you’ll need it? That’s the current U.S. retirement system, and many experts feel it’s broken.
Is the American dream of retirement unrealistic at a time when the financing falls squarely on the shoulders of the average person?
A lack of financial education, coupled with stagnating wages and longer lives, have made saving for retirement insurmountable for many.
Take this statistic that illustrates how confused many people are about their 401(k) investments: According to a study by Principal Financial Group, 59% of respondents who thought they were contributing to their 401(k) actually were not.
“The American retirement system is ridiculous. It places far too much burden on the worker,” said Teresa Ghilarducci, a professor of economics at the New School and director of the university’s Schwartz Center for Economic Policy Analysis. “Most employers don’t contribute to their workers’ retirement accounts, and most people miss out on the benefits of compound interest by not starting to save early.
“Workers must decide how much to invest, where to invest, avoid costly fees and conflicted advice, and estimate when they and their spouse will die to make their savings last for the rest of their lives. It’s nearly impossible,” Ghilarducci added.
In another data point that shows the disconnect between savings goals and reality, the Schroders 2024 U.S. Retirement Survey found that Americans with workplace retirement plans believe they need $1.2 million to retire comfortably. However, 46% expect to have less than $500,000 saved by retirement, including 23% who anticipate having less than $250,000.
Larry Fink, the chair and chief executive of investment-management firm BlackRock, said earlier this year that the retirement crisis in the U.S. is “so big and urgent” that government and corporate leaders need to stop business as usual and tackle the problem so that future generations can grow older with dignity.
“Today in America, the retirement message that the government and companies tell their workers is effectively: ‘You’re on your own.’ And before my generation fully disappears from positions of corporate and political leadership, we have an obligation to change that,” Fink said.
Workers not understanding if they’re investing in their own retirement accounts could have repercussions in the future if Americans fail to save enough to survive their retirement years.
“Every month and year [that] employees are not contributing requires them to play catch-up and takes away the biggest advantage they have in saving for retirement: time,” said Chris Littlefield, president of retirement and income solutions for Principal Financial Group.
“With growing financial pressures, it’s more important than ever that employees have a plan in place for their retirement,” Littlefield said. “That plan starts with understanding the level of income they will need in retirement to maintain their lifestyle, and should include methods for regularly tracking progress.
“If they incorrectly believe they are saving, every pay period in which they are not contributing to their workplace retirement plan makes their ability to achieve retirement success more challenging,” he added.
Littlefield said there may be a couple of factors contributing to the misunderstanding around enrollment and contributions — one being the differences in plan designs offered by employers.
American workers average more than 12 jobs throughout their careers, according to the U.S. Bureau of Labor Statistics. That means they will encounter a variety of retirement-plan designs; some have automatic enrollment while others require employees to sign up themselves.
“Unfortunately, these differences can result in confusion and uncertainty among employees, who may assume that being automatically enrolled into a previous employer’s retirement plan is common practice for future employers,” Littlefield said.
In addition to differences in how employees are enrolled into various employer plans, the proliferation of direct deposit has made it more difficult for employees to see and review the deductions being made from their paychecks, Littlefield noted.
A good rule of thumb for the average working American is to save at least 15% of their annual income when including the employer match — but very few employers offer automatic deferral and matching contribution rates that produce that recommended minimum amount, Littlefield said.
According to Vanguard’s new “How America Saves” report, the average participant deferral rate matched was 7.4% of their annual salary. When combined with employer contributions, the average participant total savings rate kept pace with the all-time high of 11.7% reached the previous year.
Still, as many as 28% of Americans have nothing saved for their retirement, 39% aren’t contributing to a retirement fund and another 30% don’t think they’ll ever be able to retire, according to a recent GoBankingRates survey.
Read: Zero. That’s how much 28% of the country has saved for retirement.
As of the first quarter of this year, the average 401(k) account had a balance of $125,900, according to Fidelity Investments. But the median 401(k) balance was $28,900, Fidelity noted.
While 69% of private-industry workers have access to an employer-based retirement plan, only 52% participate, according to the U.S. Bureau of Labor Statistics.
“The financial system is set up to allow us to fail,” said Steven Charlton, founder of financial advisory firm Wisdom Financial and a certified financial fiduciary.
“Simple financial education for everyone should be provided. Certainly we have responsibility to ourselves as well, but financial education should be a starting point,” Charlton said. “There’s a problem in the system. It’s difficult to find unbiased financial education.
“The financial adviser has to want to dedicate unpaid time to education, and there’s not a lot of that happening,” he added.
While some of the responsibility falls on the individual, the fact remains that the government, schools and employers also play a role in financial education.
“The American retirement system is voluntary, individual-directed and commercial. It is better suited for robots with spreadsheets than for real human beings,” Ghilarducci said.
