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Will Your Retirement Savings Provide The Income You Need?

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Diane Oakley, Retirement Savings

With Diane Oakley, Executive Director of National Institute on Retirement Security

US Retirement Savings & Assets Data is Discouraging

While most Americans don’t save as much as they should, is the retirement savings crisis worse than we think? Of 38 million working-age households, fully 45% do not have any retirement assets at all. And older Americans —between the ages of 55-64—only have a median of $12,000 in their IRA or other retirement accounts.

Planning for Retirement: Income Multiples and Employee Benefits

Diane Oakley’s organization does research on America’s retirement trends and directly knows a lot about our preparedness as a nation for retirement because she’s been involved in retirement planning, social security, and related issues at the highest levels of government. Diane shares some rather shocking statistics on retirement.

90% OF US ARE GROSSLY BEHIND WHERE WE SHOULD BE ON RETIREMENT SAVINGS

For example, while most people need a certain multiple of their income to maintain their lifestyles in retirement, 90% of us are grossly behind where we should be on retirement savings. This happens in an era when “defined benefit” plans have been replaced by “defined contribution” plans, so we have no guarantee of the income we’ll have in retirement and are essentially left to sink or swim on our own. Wealthier folks generally tend to be better prepared for retirement with a stable “three-legged stool” that’s made up of an IRA, a 401(k), and a defined benefits plan—but they are in a minority. Most Americans, however, are way behind on their retirement savings and need to step up their savings in order to secure the retirement income they’ll need.

Retirement Savings Schemes

Diane shares her thoughts on how much we should save per year to make sure we are prepared for retirement, as a percentage of our income, and the bare minimum we should have (as a multiple of the last salary) going into retirement. She also offers tips on savings schemes that are matched by the government and should be taken advantage of so we can all better prepare for a dignified retirement as jobs also continue to get scarce for older Americans, especially when economic growth slows.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: Is America’s retirement savings crisis worse than we think?  You know, I hate to roll out these kinds of provocative statements, but the facts are disturbing.  Out of 38 million working age households, 45% don’t have any retirement account assets at all, and those from 55 to 64, which are considered near retirement, only have a median of $12,000 in their IRA’s or their 401k’s.  $12,000!  A third have nothing saved at all.  To understand more, and see what can be done, I’ve invited Diane Oakley to join me today.  Diane is the executive director of the National Institute on Retirement Security.  Hi, Diane, welcome to the show.

Diane Oakley: Hi, Steve.  Great to be with you today.

Steve Pomeranz: Tell us what the Institute of Retirement Security actually is.

Diane Oakley: We are a research and education non-profit organization that does research on retirement security issues, and how that all plays out within the overall economy.

Steve Pomeranz: You survive on contributions from the government, from corporations and different entities?  Different pensions plans and the like, is that …

Diane Oakley: Exactly.

Steve Pomeranz: Okay.

Diane Oakley: We’re a membership organization. We have a lot of pension plans, we have a lot of firms that work with them.

Steve Pomeranz: Okay.

Diane Oakley: We have employee organizations that work with them, as well.

Steve Pomeranz: You don’t really have an agenda, except the truth?

Diane Oakley: That’s what we’re trying to get at, exactly.

Steve Pomeranz: All right.  You know, I do a lot of retirement analysis in my practice, and I can tell you, people are anxious about their ability to retire comfortably.  Give us some perspective on what people are doing now versus what they need to do in order to meet these retirement goals.

Diane Oakley: You know, a couple years ago, we started looking at the data that the federal reserve has on people’s financial assets.  All their financial assets, not just their retirement accounts, but their house and other things.

Steve Pomeranz: Mm-hmm (affirmative).

Diane Oakley: When you look at that data, one of the things we realized is that while some individuals are doing really well, if you’re in the top set of the income brackets, you’re probably in a fairly comfortable position.  You’ll have what people often have called about the three-legged stool.  You’ll probably have an IRA, you may have a 401k plan, and you may even have a defined benefit plan.

Steve Pomeranz: Mm-hmm (affirmative).

Diane Oakley: For a lot of individuals, they don’t even have anything saved.  They don’t even have a retirement account, especially when you look at households.  It’s important to look at households because ultimately you’re going to retire with your wife or your family, and you’re going to be looking at all those resources coming together.

Steve Pomeranz: Mm-hmm (affirmative).

Diane Oakley: The federal reserve data’s been helpful, but it does show some disturbing information when you really look down into the numbers and go beyond numbers. We often see when we get reports from the financial services industry about what people’s account balances and 401k plans.

Steve Pomeranz: Yeah.

Diane Oakley: They don’t tell us who doesn’t have one.

Steve Pomeranz: You know, you showed in your presentation that you’re measuring trends going back to 1979.

Diane Oakley: Mm-hmm (affirmative)?

Steve Pomeranz: What are the trends like?  Take us through some improving trends and some deteriorating trends.

Diane Oakley: Well, you know, one of the biggest changes, and we’re sort of on the cusp of this turning over, we’ve always had a good number of people who might not have been covered by pension plans.  Almost everybody has social security …

Steve Pomeranz: Mm-hmm (affirmative)?

Diane Oakley: But when it comes to having a pension plan, you know, typically what had been the case before the late ’80’s or the ’80’s or so, was that most people who had a pension plan actually had a traditional, what they call a defined benefit plan where your employer would put in money and the public sector, the employees, also put money into those plans, and you’d be provided with a benefit that was related to your final salary when you retired.

Steve Pomeranz: Mm-hmm (affirmative).

Diane Oakley: You had to work for the employer for a period of time, so that was one risk that people had if they switched employment to another job, but a lot of individuals did rely on those plans, and, in fact, the workers who are today in the workforce between ages 55 and 64 are sort of the last tenured cohort of workers who actually have almost half or more of the households in that category, having some type of income possibly coming to them from a defined benefit plan.

Steve Pomeranz: Yeah, these are the old type plans, where when you retired you’d get a monthly income based upon your wages, but they turned out, after time, to be very costly to corporations, so corporations cut back on those and started to produce defined contribution plans, where it was the contribution that had its amount defined, and the benefit was kind of unknown in the future.

Diane Oakley: Exactly.  As we switched to those defined contribution plans, it probably has done what you’re talking about, helped control some costs for the employers, but what it has done is it’s shifted an awful lot of the retirement risk …

Steve Pomeranz: Right.

Diane Oakley: …to individuals, and so individuals have to become their own investment advisor, in some cases, and I know you talk about that often with your listeners, but in addition to that, when it comes to retirement, they also have to figure out how long that money needs to last …

Steve Pomeranz: Right.

Diane Oakley: And pay them an income, which you didn’t have that problem when you had a pension.

Steve Pomeranz: You know, you showed a table from some of the work done by Fidelity and a human resources consulting company by the name of Aon Hewitt …

Diane Oakley: Yes.

Steve Pomeranz: And I’m looking at it right now, and it gives an age, and it says, really, if you retire at age 67, you contribute over a 42-year career, and you contribute, along with your employer, 15% of your salary every year, and you’re going to replace your income at retirement to the tune of about 85%.  Go through some of the amounts that you’ll need, in terms of the multiple of the income that you’re spending.  How much you’re going to need in the bank, or in your 401k’s, and all sources.

Diane Oakley: That’s sort of what it’s looking at.  It’s looking at all your resources and saying if you get to the point of 67, with roughly about eight times your salary put away at that time, you’d be able to reach that goal of probably being able to really maintain your standard of living and not have to cut back in terms of going out or going on vacations or things like that when you retire.

Steve Pomeranz: If you make $50,000 a year, you’re talking about having 400,000 in assets.

Diane Oakley: Exactly.

Steve Pomeranz: Doesn’t sound like that much, really.

Diane Oakley: It doesn’t sound like that much, but the other thing is we also measured …  because a lot of people don’t want to …  This also anticipates, to a certain extent, taking your house and monetizing it.

Steve Pomeranz: Mm-hmm (affirmative).

Diane Oakley: In other words, taking some of the equity out of your home, either by moving to a smaller home or perhaps using a reverse mortgage, which, again, has some consequences, and you want to look at those carefully.  It’s looking at all your resources being able to ply there.

Steve Pomeranz: Yeah.

Diane Oakley: What’s also interesting is a lot of people, when we looked at just their retirement accounts, what we found, for example, was very small percentage of people even having, let’s say at age 55 to 64—that group—there’s only 8% of the people in that category. Where if you look at the Fidelity numbers, if you’re 55 you ought to have at least five times savings, there’s only 8.3% of the people who have 400% or more of their current salary.

Steve Pomeranz: Yeah.

Diane Oakley: Four times their salary saved or more.  A lot of us are missing the numbers, if we want to live off of our retirement accounts, if we’re willing to do some things with our hous, and other assets that we might have, we might be able to fund an adequate retirement.

Steve Pomeranz: This goes to the point that so many people who come to me say, “When I retire, I want to have my house paid off”.

Diane Oakley: Mm-hmm (affirmative)?

Steve Pomeranz: Sometimes I have to say to them, depending upon the amount of assets they have, that that is not generally the best idea.  Especially if interest rates are low, it would be a good idea to get that money earning some kind of return, producing some kind of income, and you’re basically saying the same thing.  That you need to monetize because in these assets you’re talking about, your house is included, right?

Diane Oakley: Not in the assets that I mentioned to you, where I said most people only have about four time …

Steve Pomeranz: Okay, yeah.

Diane Oakley: Only a small percentage have four times.  Most people, really, only have one time or between one and three, really.

Steve Pomeranz: Yeah.

Diane Oakley: If you don’t want to monetize your house, and you really do have to save a lot more.  If you don’t mind that issue, you can go and look at, as you said, maybe keeping a mortgage.  What we’re seeing, though, interestingly, because we’ve also done some other analysis looking at financial security, not only in terms of how much have you saved, but what is the profile going forward for individuals with regard to expenses, and regard to opportunities because more and more people are going into retirement understanding that they’re probably going to have to work beyond what they would have liked to have retired at.

Steve Pomeranz: Yeah.  Well, we have done some shows here where we have articulated the fact that baby boomers are rethinking retirement.  They’re continuing to work because their lives are longer, what else are they going to do with themselves?  They want to stay engaged and earn some money.  They’re living more frugally and moving to places in the country that have good standards of living, but are less expensive, and so on.  Baby boomers tend to be very creative in this area …

Diane Oakley: Mm-hmm (affirmative).

Steve Pomeranz: And so the face of retirement is changing.  Is this addressed in your study?

Diane Oakley: It’s addressed a little bit, not as much in that sense.  I think we were trying to anticipate people staying …  A good number of people want to stay where they are …

Steve Pomeranz: Sure.

Diane Oakley: Because their families are there, so we’re looking at, “What do you need to be in the best possible sense?”, and then we can always work back, and people will naturally tone back from there.  We also know that a lot of people do plan to work; the reality of it is is when you talk to retirees who’ve actually been through the process, what so many retirees say is that they ended up having to retire sooner than they wanted.  They wanted to continue working, but they had to retire sooner because maybe a spouse was ill …

Steve Pomeranz: Oh, sure.  Something’s out of their control.

Diane Oakley: Or they lost a job, and …

Steve Pomeranz: Yeah.

Diane Oakley: Again, in the market today, if you’re an older American trying to find a job once you lose one is a difficult thing.

Steve Pomeranz: Yeah, not everything is in your control.

Diane Oakley: Exactly.

Steve Pomeranz: We have very little time left, Diane, but I want to get an idea.  What are some of the solutions, here, as far as you can see?  Just name a few, maybe three.

Diane Oakley: I think the first thing we all have to look at is try to save a little bit more.

Steve Pomeranz: Mm-hmm (affirmative).

Diane Oakley:      If you’re … one of the places where we’ve got the biggest challenges in individuals in the lower levels of savings …

Steve Pomeranz: Yeah.

Diane Oakley: …of income, and so individuals should look at some of the special things that exist for them.  There’s a great saver’s credit, where Uncle Sam, in essence, matches your 401k contribution, or your IRA contribution, and so people should look at that and take advantage of that on their tax forms.  I think the other thing is people have to start being realistic about planning and thinking about what do they want for retirement.  One of the things in this country is we spend too little time thinking about retirement.  75% of us think about retirement not at all …

Steve Pomeranz: Mm-hmm (affirmative).

Diane Oakley: Just a little …

Steve Pomeranz: Yeah.

Diane Oakley: Or maybe some, and we have to start planning a little bit better.

Steve Pomeranz: Wow.  My guest is Diane Oakley; she’s the executive director of the National Institute on Retirement Security.  Thanks so much for joining us, Diane.

Diane Oakley: Thanks for having me, Steve.  Appreciate it.