I am often referred to the American DC system as an example of DC working. I have never seen it working. It suffers from the same problems as the UK system which is why I am interested in this article, sent to me by Pension Oldie with the following comment.
This may be the background to the uptick in the pressure on employers to provide DB Pensions in the USA (IBM, Boeing etc.).
45% Americans Could Run Out Of Money In Retirement Despite Financial Planning: 4 Mistakes To Avoid
69 million US workers don’t have access to retirement plans through their employers
A Morningstar Center for Retirement & Policy Studies research leveraged a new simulation tool to find that 45% of Americans retiring at 65 face risks of running out of money in retirement as people live longer and share greater responsibility for their retirement savings.
The simulation considered attributes like health conditions, nursing home expenses, and demographics, among others, to reveal that single women have a 55% chance of running out of money in retirement, followed by couples at 41% and single men at a 40% risk.
Furthermore, the timing of leaving the workforce also influences financial risks in retirement, as almost 54% of US households retiring at 62 could go broke compared to 28% of retirees leaving the workforce at 70. Collecting Social Security at 62 also locks you into reduced pay for life. The Social Security Administration revealed that the average monthly check for those retiring at 70 is $4,873 compared to $2,710 at 62.
While delaying retirement is one way to increase your Social Security checks and add more money to retirement accounts, a Northwestern Mutual survey found that most people want to retire at 65.
Many of those who retire earlier cite reasons like layoffs or health challenges.
Morningstar’s associate director Spencer Look opined that these estimates could become realities for those not contributing to a retirement plan. While the retirement landscape isn’t an immediate national crisis, the future of 69 million workers or over 50% of the US workforce, hangs in the balance as they lack access to retirement plans like 401(k)s from their employers, per the Economic Innovation Group.
Morningstar research found that people who contributed to their 401(k) lifelong remain at risk of running short in retirement, possibly because they cashed out during a job change or have depleted their accounts severely through premature withdrawals. Some retirement experts also believe that many who feel prepared for retirement have a good chance of facing shortfalls in their golden years because of inadequate tax planning and knowing how to use their banking and investment accounts wisely.
Lack Of Tax Planning
Although Americans contributing their pre-tax income to traditional 401(k)s or IRAs can defer taxes on the capital gains, a lack of planning around what they have saved catches many retirees off guard. Belmont Capital Advisors president Pat Roop says retirees are surprised at their tax liabilities in retirement because many assume they will fall in a lower tax bracket when the paycheck from work stops coming.
He has witnessed many retirees remain in the same tax bracket or move to a higher one. Post-retirement spending habits stay the same or become more extravagant, especially in the first few retirement years when you suddenly have more leisure time, which many spend on travel and entertainment.
This situation leads to a higher withdrawal rate, placing you in a higher tax bracket. Since withdrawals from traditional 401(k) and IRAs are taxed like regular income, Roop suggests workers add a Roth IRA in the mix, which grows your post-tax contributions for tax-free withdrawals in retirement.
The financial expert recommended using a Roth IRA when you have to withdraw higher amounts to save significantly on taxes. You can open a Roth IRA if your modified adjusted gross income is below $161,000 for the current financial year or $240,000 for those filing jointly.
Yes, certainly, a minority of Americans retiring at age 65 face risks of running out of money and living in poverty in retirement. However, what is America’s actual retirement experience? It ain’t that!
A few years ago, the Society of Actuaries studied the retirement experience of 85+ year olds who had been retired more than 15 years and while most of them lived modestly, most were not living in poverty. In fact, for the last three decades, official government statistics show a smaller percentage of Americans over age 65 lived in poverty compared to Americans under age 65. And, in America, since poverty is measured by income, excluding certain transfer payments, and ignoring accumulated assets, the official poverty numbers greatly exceed the actual poverty numbers.
See: https://www.wsj.com/articles/another-wrong-way-to-measure-poverty-welfare-biden-fd9018b1
Certainly agree that “… the timing of leaving the workforce also influences financial risks in retirement, as almost 54% of US households retiring at 62 could go broke compared to 28% of retirees leaving the workforce at 70. …” But, did anyone notice that Americans are slowly changing their Social Security benefit decision-making – raising the average age individuals elect payments from age 63 to 65+ since the turn of the Century. 30 years ago, the average age at Social Security benefit commencement was 63.4 for women and 63.6 for men. In 2022, the average age for Social Security benefit commencement was 65.2 for men, and 65.1 for women. That is a massive shift in claiming behavior – coincident with the retirement of the Baby Boom generation.
https://www.ssa.gov/policy/docs/statcomps/supplement/2023/6b.html#table6.b5
Certainly agree that “… most people want to retire at 65. … ” However, like everything else in America, you have to choose what to prioritize, and if you want to retire at age 65, you either need to prepare (by spending less than you take home) or take a reduction in your standard of living.
Certainly agree that “… Many of those who retire earlier cite reasons like layoffs or health challenges. …” Too many Americans still live paycheck to paycheck – over 70% according to one study, where even a one-week delay in their paycheck would create a challenge to pay everyday bills. However, among that group, over 80% are saving in an employer-sponsored plan. https://info.payroll.org/pdfs/npw/2024-Getting-Paid-In-America-survey.pdf
I agree that: “… the future of 69 million workers or over 50% of the US workforce, hangs in the balance as they lack access to retirement plans like 401(k)s from their employers …” However, did you adjust for those who have access for defined benefit pension plans? Every American worker (other than the highest paid) has had access to a perfectly acceptable, tax-favored, retirement savings plan for the past 43 years – and, for those who have not had access to an employer-sponsored plan, that same alternative has been available for 50 years – the Individual Retirement Account. You can open an IRA in America with only a few bucks and since 95+% of Americans are paid electronically, consistently/periodically contribute by splitting your net paycheck.
And, yes: ” … people who contributed to their 401(k) lifelong remain at risk of running short in retirement, possibly because they cashed out …” But, participants must affirmatively elect to cash out in all situations, except where their account balance at separation is < $1,000.
Yes, "… many retirees remain in the same tax bracket or move to a higher one. …" Those are the ones who successfully saved.
So, is the problem that people don't save enough or not?
Check your facts.
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