Why Americans Need More Retirement Savings than They Think

For several decades politicians, pundits and public policy experts have debated whether Social Security and Medicare are sufficient to keep retirees solvent in the years to come, in conjunction with citizens’ own retirement plans and savings.  Is the sky falling?

The sky may not fall down, but it won’t be sunny and breezy, either.  Here are a few misconceptions about Americans’ retirement status… and why they are dangerous.

Myth: Most Americans Have Pensions

The statistic often floated is that 78% of Americans have access to a pension plan.  But access and participation are not the same thing, and while most public sector employees do participate in a taxpayer-funded pension plan, only 48% of private sector employees participate in a pension plan.

Myth: Most Americans Have a 401(k) or IRA

According to a study by the National Institute on Retirement Security, a shocking 45% of American adults have no retirement savings at all.  Another survey by Bankrate found that 36% of Americans have no retirement savings, and perhaps more troublingly that more than 25% of Americans aged 50-64 have nothing saved for retirement.    

Roughly 52 million Americans have a 401(k) account, out of roughly 268 million working age Americans, which means about 19.4% of the working age population has a 401(k).  Meanwhile, a survey by TIAA-CREF found that only 17% of Americans contributed to an IRA in 2013, down from 22% in 2012.    

Myth: Americans Are Saving Enough, Regardless of Account Type

The median amount saved for retirement is only $3,000 (see the NIRS study above).  For those approaching retirement age (ages 55-64), the number is still not much higher: a median of $12,000.  A full 92% of Americans do not have adequate retirement assets for their age and income bracket.

Americans Not Saving Enough for RetirementMyth: The Retirement Savings Gap Affects All Americans Equally

Make no mistake: the retirement savings gap is disproportionately wide for poor and middle class Americans.  Only 5.2% of the bottom quintile of Americans have a retirement account, while the majority of the top quintile of American income earners have a retirement account.  Most wealthier Americans are saving adequately for retirements, but most lower- and middle-income Americans are not.

Myth: Lower & Middle Class Americans Will Make Do with Social Security

The Social Security income “replacement rate” for the average person retiring at 65 is only about 40% of what they were earning before they retired, according to the OECD.  This says nothing of the fact that Social Security is notoriously insolvent in the long term, which means further cuts will come down the pike eventually.  Read: you can’t count on Social Security for much of your retirement income.

Retirement can be the best years of your life, but not if you can’t afford to visit your children and grandchildren, or visit the doctor.  As tempting as it is to spend now and save later, most Americans need to be saving more money for retirement than they are now.  The good news is that IRAs and 401(k)s offer excellent tax advantages, and many employers will match part of your contributions.

Related Reading:

The Pre-Retirement Checklist: 10 Tips Before Making the Retirement Leap

Taxes vs. Retirement: Extend Your Nest Egg by Moving Away from Taxes