The rise of 401(k) plans has left most Americans unprepared for retirement. The average family only has $5,000 saved in a retirement account, according to a new report by the Economic Policy Institute.
The report, “The State of American Retirement,” found 401(k) plans have magnified economic inequities. While the median family between the ages of 32 and 61 only has $5,000 in a retirement account, the top 1 percent of families have $1 million or more. For many groups—lower-income, black, Hispanic, non-college-educated, and unmarried—the typical working-age family has no savings at all in these accounts.“Our retirement system used to reduce inequality, but since the shift to 401(k)s it has only served to magnify it,” EPI economist Monique Morrissey said in a statement. “These accounts are accidents of history that were never designed to replace pensions, and it should come as no surprise that they have not worked for the majority of people.
“Decades after the rise of 401(k)s, pensions are still far more important to retired people. To make sure Americans are prepared for retirement, we need to defend existing pensions and expand Social Security.”
The report found that nearly half of all working-age families have zero retirement savings. While almost nine in 10 families with incomes in the top fifth have savings in retirement accounts, fewer than one in 10 families in the bottom fifth have retirement savings. Only 41 percent of black families and 26 percent of Hispanic families have retirement account savings, compared with 65 percent of white non-Hispanic families. Only married couples are more likely than not to have retirement account savings.
The report underscores the importance of preserving and expanding Social Security, defending pensions for workers who have them, and seeking solutions for those who do not, Morrissey said. Social Security benefits are by far the most important and evenly distributed income source in retirement. Traditional pensions remain the second most important source of retirement income after Social Security. Pension benefits are six times larger than distributions from 401(k)s and IRAs.
Bankrate Makes Similar Findings
Meanwhile, a new Bankrate analysis reached a similar conclusion, finding a “widespread lack of retirement preparedness at a time when many people have a hard time planning even week to week, let alone for an event that is decades away.”
The Bankrate analysis found that retirees had average incomes equal to just 60 percent of working-age households, 10 percentage points short of the 70 percent “replacement rate” that most financial advisors recommend. In only three states—Hawaii, Alaska and South Carolina—did Bankrate find that average retirement incomes topped 70 percent of pre-retirement incomes.
“Americans are facing a shortfall of retirement income (because) their saved assets are not enough to fund their desired or even current lifestyle,” James Carlson, chief investment officer at Questis, a Charleston, S.C.-based financial services firm, told Bankrate.
The Bankrate analysis found ratios of pre-retirement income that seniors are replacing range from a high of 73 percent in Hawaii to a low of 48 percent in Massachusetts. The national average is 60 percent.
Regardless of what state people live in, retirement experts recommend setting goals for the income desired in retirement and making a plan. Putting money aside automatically through a workplace or individual retirement account is considered one of the easiest ways to build a nest egg, if automatic contributions are made and withdrawals are avoided.
For their part, employers can offer automatic enrollment in 401(k)s, “target date” funds and automatic increases. The Pension Protection Act of 2006 made it easier for employers to adopt automatic enrollments, permitting the employer to choose which classes of employees are subject to auto-
enrollment. “Target date” funds, or a mutual fund that automatically resets asset mixes in its portfolio according to a selected time frame, offer a solution too. Finally, offering funds with automatic increases, usually 1 percent annually, is a good way to keep employees’ retirement goals on track without a big shock to their disposable incomes.