A new report just came out on the retirement prospects for baby boomers.* Its top-line result was that 40% of all boomers aren’t prepared for retirement.
Whenever the topic turns to retirement in America, the language is fairly dismal. Last week, I saw a flyer from an investment company that highlighted a crisis in retirement savings. Then I read an article offering expert views on how retirement in America is endangered. This type of news coverage is pretty common. And yet, is it right?
The headlines may say retirement is threatened, and it certainly seems logical to think so, given the economic crisis the world has endured the past four years. But one problem I have with most estimates of readiness is that they often take a black or white, ready or not, view—when often, it’s more a question of nuance.
In reading many studies on this issue, I’ve come to accept a different view.** First, most readiness studies suggest that over half of Americans are on track in their retirement planning. Just like the current study. The corollary of 40% being unready in the new study, of course, is that 60% are prepared.
Second, it turns out that for those who aren’t ready for retirement, many are within striking distance but need to make adjustments to reach their full retirement goals. These adjustments include saving more (e.g., 3% more per year) and working longer. This group needs what behavioral economists like to call “nudges” (to use Thaler and Sunstein’s term from their recent book.***) I’d argue that probably 20%–30% of Americans are in this “partially ready” camp.
And finally, there’s a smaller group—I’d estimate between 15% and 25% of all Americans—who are likely to be very poorly prepared for retirement. The distinguishing characteristic of this group is that they’re struggling financially in their working years. In other words, a difficult life while working usually translates into a difficult life in retirement. Because the main financial goal for people in this group has to be about building work and financial security today, they’re unable to focus on preparing for the future.
Curiously, much of the national dialogue on retirement assumes that there are few Americans in the first two groups (on track or close to being on track for retirement) and many of us in the third group (poorly prepared for retirement)—exactly opposite of what the data suggest.
Perhaps this confusion is to be expected. There’s something to be said for using fear as a motivating force, especially given the difficulties most of us have in planning for long-term goals such as retirement. Yet, in the end, this constant stream of worry does lead us to have an unreasonably pessimistic view of ourselves and our financial prospects as we approach retirement.
* http://www.urban.org, “Boomers’ retirement income prospects.”
** The formal papers I’m drawing from include retirement readiness studies from researchers at Boston College; the Employee Benefits Research Institute; the Wharton School; the University of Wisconsin; the Federal Reserve; Williams College; and RAND.
*** Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard H. Thaler and Cass R. Sunstein.