The new retirement

Posted by on May 10, 2010 @ 9:31 am in Retirement

A new poll from Gallup says that Americans expect to depend more on Social Security when they retire—and less on 401(k)s, IRAs, and part-time work. I don’t believe it for a minute.

These findings are part of a national survey polling nonretirees age 18 and older. Compared with 2007, workers in 2010 are saying they are going to rely more on Social Security, and rely less on most everything else needed to finance retirement—401(k)s, IRAs, work, company pensions, and home equity.

What is this poll really telling us? My guess is that American opinion is heavily biased by recent experience. Many of the elements of a retirement program declined as a consequence of the great mortgage meltdown and the ensuing financial crisis. There has been a partial recovery. But the anxiety lives on.

In reality, the evolution of retirement in America remains unaltered by the 2008–09 crisis. We already know the contours of what is sometimes called “the new retirement.” First, social programs, such as Social Security and Medicare, will be less generous for future retirees because of their fiscal imbalances. This is well known. But by no means should you jump to the conclusion, often also cited in polls of younger Americans, that Social Security will be nonexistent for future generations. Even without reform, Social Security benefits will continue to pay out at 70%–75% of their current level for the next century.

Second, work will play a greater role in the financing of retirement. This trend is already underway. A majority of households in their late 60s have earnings from work—and this is only set to rise. We know that baby boomers, while better paid and better educated than their parents’ generation, also have saved less as a demographic cohort. So a longer period of work—a.k.a. a shorter period of retirement—is inevitable.

And third, despite the 08–09 market decline—and the poll results—we know that tax-deferred accounts like IRAs and 401(k)s will only grow in importance as an essential resource for future retirees. The median tax-deferred holding among households near retirement was around $100,000 when the government last did its major survey in 2007. That median value fell, of course, but now has likely recovered. It’s expected that this median will more than double in the coming decade. Indeed, at some point in the future, experts anticipate that tax-deferred accounts will generate more aggregate retirement resources than Social Security.

So ignore the polls. The contours of the new retirement are clearer by the day, despite Americans’ (completely understandable) reaction to the recent mortgage and market decline.

Note: The link to Gallup.com will open a new browser window. Except where noted, Vanguard accepts no responsibility for content on third-party websites.

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