For 72-year-old Jacqueline Withers, retirement has been rocky. And she’s not alone, as it turns out.
Eight years ago, the Jacksonville, N.C. resident stepped away from her job as a home healthcare aide because of a heart condition. She tapped into her Social Security. But it was not — then or now — enough to make ends meet. Her $1,700 monthly check only covers 90% of her very basic living costs. The remaining 10%? A measly pension takes care of that.
The trouble is, she said, “I don't have enough income to pay my medical bills and buy decent food to live on.”
Retirement in America is a disaster for many like Withers. And no one — politicians, financial planners, pick your own expert — seems to know what exactly to do about it.
I have been covering all this for years as a journalist, book author, and public speaker. Trust me, the state of retirement in America has never been this bad since the federal law that molded the majority of today’s retirement landscape, the Employee Retirement Income Security Act, or ERISA, was signed into law 50 years ago.
Of course, the system has worked for many of us. Especially if you’ve been lucky enough to have worked for a company with an old-timey pension, received a match-enhanced 401(k) plan, and/or are a close relative of a Connecticut hedge fund guy.
And, for sure, there’s hope for the current generation of workers if there’s a will to fix the system and educate the masses. (Spoiler: It will be a tough slog to change things.)
The heart of the matter is this: ERISA, which was designed to protect our interests by overseeing things like 401(k) and pension plans, only works for some of us. It sets minimum standards for retirement plans in the private sector and requires plan administrators to act in your best interest. It does not, however, requireany employer to establish a retirement plan.
There are reasons behind this mess.
Many small businesses, for instance, steer clear of the plans; owners claim they are too costly and complex to navigate. Another reason: Employers have slashed traditional pension plans over the years, partly because of those stricter ERISA rules and costs associated with those plans.
Those who won that traditional pension plan lottery were guaranteed lifetime income streams. Today, just 11% of private employees participate in traditional, or so-called defined-benefit, pensions, compared with around 35% in the early '90s, according to Mark Miller, a retirement expert and author of "Retirement Reboot."
It also doesn’t help that many Americans are nearing retirement or are in retirement with massive amounts of credit card and medical debt, according to Federal Reserve data. Debt for households headed by people aged 65 to 74 has more than quadrupled since 1992, from $10,150 to $45,000 per household in 2022 (the most recent figures). For those 75 and up, debt has increased sevenfold.
Anatomy of a crisis
If you don’t believe me about the sorry state of retirement in America, maybe some of the more than two dozen retirement experts I interviewed can convince you.
They’ll tell you that millions of seniors are living in poverty, and many millions more lack the savings or retirement plans needed to survive comfortably in old age. That’s even before massive healthcare expenses like assisted-care facilities and nursing homes, which is a retirement killer in and of itself. (An assisted-living facility had an average rate of $72,000 a year as of December 2023, according to the National Investment Center for Seniors Housing & Care. For a memory care unit, the average rate is $94,788 annually.)
“Few people are well-prepared for these expenses,” said Edward A. Miller, Department of Gerontology chair at The University of Massachusetts Boston. “Denial is common — or they feel, … erroneously, that Medicare covers long-term care or that Medicaid will do so without them having to impoverish themselves first.”
Others agree we're in real trouble.
The retirement crisis “is not overblown,” said Richard Johnson, director of the Program on Retirement Policy at the Urban Institute. “We see a large number of people struggling to make ends meet … or [having experienced] a substantial decline in living standards.”
Alicia. H. Munnell, the Center for Retirement Research at Boston College. (Photo Caitlin Cunningham) ·Caitlin Cunningham
“Undersaving for retirement is a bigproblem,” said Alicia H. Munnell, the legendary director of the Center for Retirement Research at Boston College.
And this from Surya Kolluri, head of the TIAA Institute: The retirement crisis “is even more severe if you start disaggregating the data by gender, by race, by ethnicity, by geography. Based on our research, over 40% of all US households might expect to run out of money in retirement.”
Here’s some more data to chew on.
According to a simulated model that factors in things like changes in health, nursing home costs, and demographics, about 45% of Americans who leave the workforce at 65 are likely to run out of money during retirement, per Morningstar's Center for Retirement and Policy Studies. The risk is higher for single women, who had a 55% chance of running out of money versus 40% for single men and 41% for couples.
Boston College’s National Retirement Risk Index, which is based on the Federal Reserve’s Survey of Consumer Finances, shows that 39% of today’s working-age households will not be able to maintain their standard of living in retirement.
Running out? (Getty Creative photo) ·SilviaJansen via Getty Images
Meanwhile, an analysis by the National Council on Aging and the LeadingAge LTSS Center at UMass Boston shows a little over 27 million households with adults aged 60 and up cannot afford basic living needs.
Even more worrisome, more than 12 million American seniors are already in poverty, per the Schwartz Center for Economic Policy analysis. Measured by global standards, one-fourth of Americans aged 65 or older (23%) are poor.
Americans 65 and older are the fastest-growing group of the homeless population in the US, and by 2030, their numbers are expected to triple, according to Dr. Margot Kushel, a professor of medicine at the University of California at San Francisco and director of the UCSF Center for Vulnerable Populations. Among single homeless adults, approximately half are aged 50 and older.
“It’s chilling,” Ramsey Alwin, chief executive of the National Council on Aging, told Yahoo Finance, and “unacceptable.”
'A generational cycle of falling short'
Expenses are a killer.
The Elder Index, created by gerontologists at the University of Massachusetts Boston, calculates how much older adults need to meet their basic needs. For example, in the Los Angeles Metropolitan area last year, a single renter over the age of 65 in good health needed $2,997 per month for housing, healthcare, food, transportation, and other expenses, according to the calculator. The same renter in Pittsburgh, Pa., needed $2,194. Nationally, the average Social Security retirement benefit in August came to about $1,784 monthly.
All of those factors are already whacking retirement for many Americans. “This is a substantial portion of the population that may have to downsize,” said Anqi Chen, a senior research economist and the assistant director of savings research at the Center for Retirement Research at Boston College.
“And the fallout from not having ‘enough’ or having to cut back in retirement can also include relying on your children to cover shocks, like long-term healthcare, when they should be saving, accumulating assets, and earning returns for their own retirement,” Chen said.
“This,” she added, “creates a generational cycle of falling short in retirement.”
In other words: Ugh.
Solutions?
I’m afraid to say it is what it is in the short term. Long term? There are ways to make some progress, but we need the political will — and would likely have to pay the price in taxes.
Let’s start with AARP Public Policy Institute's senior strategic policy adviser, David John.
“We need to have a universal retirement savings system,” he said. “It doesn't necessarily mean a government system. It could be a series of state-facilitated systems. But one way or the other, every American has to have the ability to save for the future from the day they start work until the day they retire.”
There are glimmers of hope here for folks without an employer-provided plan.
A growing number of states have passed laws in recent years to help. These include Oregon, Colorado, Connecticut, Maryland, Illinois, California, and Virginia.
As of June 30, 20 states have enacted new programs for private sector workers, and 17 of these states are auto-IRA programs. They require most private employers that don’t sponsor a savings plan of their own to enroll workers in a state-facilitated individual retirement account (IRA) at a preset savings rate — usually 3% to 5% of earnings — which is automatically deducted from paychecks. The plans typically ramp up their employee’s contribution by 1% each year until it reaches 10% unless an employee opts out.
“While these workers can set up any kind of IRA, there are a lot of choices to make in the private market,” said John Scott, director of Pew Charitable Trusts' retirement savings project. “In contrast, the state programs provide a simple, easy option so they can start saving quickly.”
Beginning this year, eligible businesses with 50 or fewer employees can qualify for a credit equal to 100% of the administrative costs for establishing their own workplace retirement plan.
Said Teresa Ghilarducci, a labor economist at the New School and the author of "Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy," "Every worker should be covered by a retirement plan, in addition to Social Security, and enrolled automatically as they are in Social Security.”
Teresa Ghilarducci: “Every worker should be covered." (Photo courtesy of Teresa Ghilarducci) ·Teresa Ghilarducci
Where’s the money?
David John of AARP also said it is important for people to be able to keep track of their savings. And for the most part, “that means having their savings balances move with them, unless they decide otherwise, from job to job,” he said. “Auto portability is a good first step towards that.”
A new law, in fact, aims to keep workers from cashing out their 401(k) retirement savings accounts when they move from one job to another, building on a similar effort launched last year by the private sector. It paves the way for employer retirement plans to provide automatic portability services, so funds can be transferred seamlessly into a new employer plan unless the worker opts out. (The limit for automatic rollovers is $7,000.)
Pulling money out of a tax-deferred retirement fund before you’re 59 and a half is costly. The IRS levies a 10% penalty on distributions taken before the account holder is 59 and a half. And income taxes are due on the funds that are withdrawn. Ultimately, you lose out on the compounding effects if the balance remains untouched.
I admit I did this myself when I was 30 and changing jobs, and it pains me to think what it might have been worth today. Back then, retirement seemed so far away that it never even occurred to me that I would regret that decision.
Turning 401(k)s into old-fashioned pensions
John also believes “we need to have a simple low-cost way of helping people to actually use their retirement savings effectively once they retire.”
What he is talking about is creating some organized way to help people pull money from their retirement accounts to, in essence, predictably pay themselves in retirement without all the angst of deciding which accounts to pull from and navigating the tax implications.
People freeze for fear of running out of money if they spend too much or for not understanding the mechanics of pulling money out of these accounts.
"Perhaps the hardest problem to solve is helping people to convert their savings into retirement income," John said. "Everyone’s circumstances are at least slightly different, and all too often, people are just handed their money and told they have to make the decisions about how to use it."
This leads some people to spend too quickly and others to hoard their savings so the money will be available when a future crisis appears, he added.
There are new ideas coming on board all the time to solve this roadblock. A rising number of employers are offering annuities in their 401(k) plans. And more people, for example, are building their own do-it-yourself income stream with a single-premium immediate annuity (or SPIA). SPIA sales are on track to meet or exceed the record sales this year, according to LIMRA.
Currently, a $100,000 SPIA would pay $709 a month for a single 70-year-old man in Washington, D.C., according to immediateannuities.com. You can tack on special terms, called riders, but you’ll generally get smaller monthly payments.
These annuities are the most basic plans: You pass along a chunk of your retirement savings to an insurer, and presto, you begin receiving a guaranteed paycheck until you die. The amount you get paid each month is calculated based on a variety of factors including the amount you put into the annuity, your age, gender, and the current interest rate.
There are a few drawbacks. There are typically no refunds, so once you make that choice, you can’t go back or change the amount you get each month. You can’t have a beneficiary named to them, which means that when you die, the income screeches to a halt. Another niggle is that with SPIAs your payments will not be adjusted upward for inflation.
"Some level of guidance, probably through a flexible default solution, would help new and future retirees to effectively use their savings and have a better retirement," John said. More widespread use of annuities could be a retirement life preserver, but for now, too many of them are baffling and costly.
Fix Social Security and Medicare?
The 2024 Social Security and Medicare Trustees Reports projected that in nine years Social Security's key reserve will run low. The upshot is that unless Congress figures out a way to fix it before we hit that flashing light, benefits would potentially get slashed by 20% for seniors.
For years, there have been droves of solutions spinning about what could and should be done to prevent the shortfall, including ratcheting up payroll taxes that fund the program, currently 12.4% split evenly by employees and employers.
But tweaking Medicare is another issue and perhaps as urgent given the health care needs of boomers.
Remember those big long-term care bills I was talking about? This is a big one. Currently, Medicare does not pay for such care, so older adults and their families bear this financial risk directly. Medicaid covers nursing homes, but only after older adults spend down their assets to less than $2,000. This is probably a pipe dream, though, because it would be expensive to pay for it.
Another idea: Earlier coverage for Medicare benefits before age 65, the current age to enroll, would help folks save more for the future. It would also prevent them from draining their finances for medical bills.
A lot of people lose their jobs or take early retirement between the ages of 50-65 and don’t get full-time jobs with health benefits. If you're self-employed, you can use the individual health insurance marketplace to enroll in health coverage, but I’ve been down that road in my 50s, and it isn’t cheap. My premiums topped $1,200 a month for a high-deductible plan, and I had no health issues.
But the biggest long-term solution of them all might be this: Educate kids early on about how to manage money and save — and on the importance of participating in retirement plans.
Let’s have John Scott, director of Pew’s retirement savings project, tell us why.
“We need more financial education,” he told me. “If it’s delivered at the right point in time and in the right dose to use a medical term, it can be very helpful to people. So, for example, when people are retiring, it is good to know, you know, what is an annuity? You know, or get some information about what are my options for taking money out of my company retirement plan, or, or how should I be taking Social Security?”
It's too late for Withers, but just in time for younger generations who may be about to fall into the same traps as their parents.
