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Sun June 9, 2013
Golden Years Tainted As Retirement Savings Dwindle
Originally published on Mon June 10, 2013 8:58 am
"I'm a carpenter/cabinet-maker/woodworker, and I think I'll be retiring the day I die."
Michael Powers, 47, is not alone in his retirement insecurity. According to a Pew study published in May, members of Generation X — aged 38 to 47 — are on track to be the first generation to do worse in retirement than their parents. Assuming they retire at all.
For almost a century, it's been a tenet of the American dream: Work hard enough, and you'll get to rest and relax in your golden years. But retirement as we know it may be consigned to the dustbin of history.
Powers lives in Washoe Valley, Nev., with his wife, Katharine. At 46, she manages an office suites company. The Powers have three children, and like many people of their generation, they didn't even start saving for retirement until well into their 30s.
"We moved back and forth quite a lot, and didn't really save a whole bunch. We did start saving probably only about 15 years ago," Michael Powers tells Tess Vigeland, guest host of weekends on All Things Considered. "I had a profit-sharing with the construction company that I used to work for, but that's all gone now."
In 2007, business was booming. The housing bubble kept him busy, and the couple was able to save. They'd put away more than $15,000, but then the crash came.
"We lost a whole bunch of the money ... and we even at one point had to take some out because it was getting really bad there for a while," Katharine Powers says.
The worst year was 2009, after Michael Powers lost his job. They used their small retirement fund for daily living expenses. He says things are better now, but it's still tough to make ends meet. He had been making about $100,000 a year. Last year, they made $30,000.
"We're not poor. We're very thrifty," he says. "But there's no retirement, not a lot of extras happening."
Of that $15,000 they'd saved before the recession, only a few hundred dollars remain.
Taking A Hit
"Gen. X looks to be the first generation that will not exceed the wealth of the group that came before them, and to potentially face downward mobility in retirement," says Erin Currier, director of economic mobility for the Pew Charitable Trusts.
The Pew study compared Generation X to previous generations, like the baby boomers (ages 48-65). The study looks at "replacement rates," how much of people's pre-retirement income they can replace with savings.
Wealth managers recommend having enough to replace 70 to 100 percent of your income when you retire. Here's the study's replacement rate breakdown:
- Early boomer: 70 to 80 percent
- Late boomer: about 60 percent
- Generation Xer: about 50 percent
Currier says the recession took a particular hard toll on Generation X.
"They lost the highest percentage of net worth than the other groups, losing an average of $33,000 in their net worth," she says.
But Currier says there were signs even before the recession that Generation X would not exceed the wealth of the previous generation. Contributing to their insecurity are big student loans and wages that haven't kept up with the cost of living.
Counting On The System
The retirement system itself could also be a factor in how — or if — this generation is saving. A dominant savings vehicle for Americans under 50 is the 401(k).
But fewer than half of Americans have access to a 401(k) plan through their employer, Currier says, "and a very small percentage of them try to get retirement plans on their own through an IRA."
With a 401(k), workers are allowed — but not required — to invest their own money, rather than having the company automatically set aside and manage a pension for you. In theory, it gives you freedom.
"Our experiment with the do-it-yourself, individual-directed, commercially provided 401(k) plan has not worked," says Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School. "It's an abysmal failure in almost every way, and almost all experts agree that something has to change."
Her suggestion is to "go back to the basics."
"Make sure that people save where they can save — and that's at the workplace," she says. The further along you are in your career, she says, the more you'll have to save.
Yet Ghilarducci realizes it's difficult to ask people to put aside their own wages, particularly if where they are putting that money isn't secure.
"There has to be new institutions that guarantee a modest but safe continual rate of return," she says. "And we can do that by adding to the Social Security system, a place where people can save their money and get a rate of return that's safe."
She notes that a number of states are trying to find ways that residents can save money through the public employees' retirement systems.
'Most Precious' Period Of Life
However those initiatives work out, most changes will come too late for people now in their late-30s and 40s. Meaning people like Katharine Powers may have to revise their vision for retirement.
"We've been married 26 years. It would be nice just go on road trips together, spend time alone together, since we've had a child in the house for over 22 years now," she says.
Missing out on that part of life isn't just bad for the Powers. Analyst Ghilarducci says it's bad for all of us.
"After the Great Depression, there was this idea that everybody deserves some time to themselves, to decide what they do with their time. They got the weekend, they got holidays and they got retirement," she says.
"And to me, that's one of the most precious periods of our life because we're going to die after that period, and we need some time to connect to not only the people that we love, but ... to create a personal narrative about what our life meant."
But that concept of our golden years increasingly feels like a mirage.
TESS VIGELAND, HOST:
It's WEEKENDS on ALL THINGS CONSIDERED from NPR News. I'm Tess Vigeland.
For almost a century, it's been a tenet of the American Dream: Work hard enough and you'll get to rest and relax in your golden years. Travel, volunteer, see the grandchildren. It's a familiar image in TV ads for companies that manage retirement funds.
(SOUNDBITE OF TV AD)
ANNOUNCER: Your generation is definitely not headed for Bingo night. In fact, you could write a book about how you're going to turn retirement upside down.
VIGELAND: But retirement as we know it may be consigned to the dustbin of history. According to a new Pew study, Generation X - aged 38 to 47 - is on track to be the first generation to do worse in retirement than its parents, assuming it retires at all. That's our cover story today, rethinking retirement, Gen X and beyond.
(SOUNDBITE OF SONG, "GIMME SOME LOVIN'")
BLUES BROTHERS: (Singing) Gimme some lovin'. Gimme, gimme some lovin'. Gimme some lovin' every day.
MICHAEL POWERS: I'm Michael Powers, 47 years old. I live in Washoe Valley, Nevada. I'm a carpenter/cabinet maker/woodworker. And I think I'll be retiring the day I die.
KATHARINE POWERS: I'm Katharine Powers. I'm 46. I manage an office suites company. And I guess I'll be retired right after I die.
VIGELAND: Michael and Katharine Powers are hardly alone. There's no other way to put this. Middle-aged Americans are in dire straits with a median net worth of just $15,000. What was once a guaranteed notion of retirement at 65 is as antiquated as your grandmother's silver. The Powers have three children. And like many people of their generation, they didn't even start saving for retirement until well into their 30s.
POWERS: We did start saving probably only about 15 years ago. I had a profit sharing with the construction company that I used to work for. But that's all gone now.
VIGELAND: In 2007, business was booming. The housing bubble kept Michael busy and the couple was able to save. They put away more than $15,000 when the crash came.
POWERS: When the economy started failing, you know, we lost a whole bunch of the money that we had in. And, you know, we even at one point had to take some out...
POWERS: Oh, yeah.
POWERS: ...because it was getting really bad there for a while.
VIGELAND: 2009 was the worst year. After Michael lost his job, they used the small retirement fund for daily living expenses. He says things are better now, but it's still tough to make ends meet.
POWERS: I was making between 100, $110,000 a year. And then now, last year, we made $30,000. You know, we're not poor. We're very thrifty. You know, we don't buy new things. We...
POWERS: ...which we would do anyway.
POWERS: ...yeah, which we would do mostly anyway. But there's no retirement. There's, you know, not a lot of extras happening.
VIGELAND: Of that 15 grand they'd saved before the recession, only a tiny bit remains.
POWERS: We have an IRA that has about $500 in it.
POWERS: Mm-hmm. Yup.
POWERS: Yeah. Actually, that's probably generous, $317 in Facebook stock, to be honest.
ERIN CURRIER: Gen X looks to be the first generation that will not exceed the wealth of the group that came before them and to potentially face downward mobility in retirement.
VIGELAND: That's Erin Currier with the Pew Charitable Trusts. Last month, they released a big study comparing the retirement savings of Generation X to previous generations - from baby boomers who are 48 to 65 years old to Gen Xers.
CURRIER: What we did was look at replacement rates, which is how much savings and wealth a person will have to be able to replace their pre-retirement income. Most financial planners recommend being able to replace 70 to 100 percent. And the typical early boomer has acquired enough savings and wealth to replace between 70 and 80 percent of their income once they leave the labor market.
VIGELAND: So they're right on target.
CURRIER: They're right on target. The typical late boomer will replace about 60 percent, which is a little bit insecure. But the typical Gen Xer is only on track to replace 50 percent.
VIGELAND: Well, let's zero in on the Gen Xers. We are what, five going on six years past the financial crisis of 2008, 2009. How much did that hurt this particular generation?
CURRIER: Well, the great recession absolutely took the largest toll on Gen X. They lost the highest percentage of net worth than the other groups, losing an average of $33,000 in their net worth. And they also took the biggest hit to their home equity in terms of percentage loss. So as a group, they definitely got hit. But even before the recession, there were signs that they were not on track to sort of exceed the wealth and the savings of the group that came immediately before them.
VIGELAND: Aside from the great recession, let's talk about the retirement system itself and where that might be playing into this lack of retirement funding for Gen X. How much of a role does the 401(k) system play in all this?
CURRIER: That's a great question. What we know from the data is that less than half of Americans have access to a 401(k) through their employer, and a very small percentage of them try to get retirement plans on their own through an IRA. So for the group that is in the stock market, they've been able to - certainly, they took a hit during the recession, but they've also been able to take advantage of some of the recovery that has occurred since.
For people who are not engaged in any kind of retirement planning whatsoever, unless some dramatic change happens in terms of their savings rates and their ability to acquire wealth, there is going to be a substantive portion of the Gen X group that will not have a secure retirement.
VIGELAND: And that does not bode well for Gen Y and the Millenials.
CURRIER: No, it does not.
VIGELAND: Erin Currier of the Pew Charitable Trusts. Why is this generation having such a tough time? Well, they took out big loans for college, and wages have not kept up with the cost of living. But they also, for the most part, are doing without a retirement savings vehicle that previous generations had. Michael Powers, for one, misses it.
POWERS: It's not like, you know, our grandparents had it with, you know, jobs with pensions. And, I mean, for a normal working person, you know, there are no jobs with pensions or insurance.
VIGELAND: For most Americans under 50, the savings vehicle they're most likely to use is the 401(k). Instead of a company automatically setting aside and managing a pension for you, the 401(k) allows workers, but does not require them, to invest their own money. Sometimes, there's a company match. In theory, it gives you freedom.
TERESA GHILARDUCCI, THE NEW SCHOOL: Our experiment with the do-it-yourself, individual-directed, commercially provided 401(k) plan has not worked. It's a abysmal failure in almost every way. And almost all experts agree that something has to change.
VIGELAND: Teresa Ghilarducci studies retirement policy at The New School.
SCHOOL: When people were retiring 15 years ago, many of those people who had pensions - and those were middle-class people and up - had to find benefit plans which gave them a pension for life on top of their social security. Five years later into the mid '90s, 2000s and now, you're finding people who have a lump of money and their Social Security.
And that lump, on average, is about $70,000 for people now just retiring. And they're told that they are supposed to handle that 70,000 for the rest of their lives. And they're also told that they may live until they're 92.
VIGELAND: Teresa, if the pension system didn't work because there were promises made that couldn't be kept - companies that essentially did not do what they promised their workers they would do - and now the 401(k) system is not working because it counts too much on us to be wise and prudent with our money, what kind of system should we have?
SCHOOL: What works is to go back to the basics. Make sure that people save where they can save, and that's at the workplace. And you start at the very beginning of your work life and you contribute a little bit. If you start - like five percent. If you start saving at 45, you have to save 10 or more percent of your income. If you start at 50, it's not too late. But you have to ratchet down your spending and really ratchet up your savings to almost 25 percent.
VIGELAND: But Teresa, haven't - don't we know at this point that people aren't built to save on their own?
SCHOOL: Yes, Tess, you're right. People - human beings cannot be told to withhold their consumption when everyone else around them is consuming and the place where they would save their money isn't safe. So there has to be new institutions that guarantee a modest but safe continual rate of return. And we can do that by adding to the Social Security system a place where people can save their money and get a rate of return that's safe - maybe three percent - or states, Tess, are looking into ways that their residents can save money through the public employees' retirement systems in the states.
Oregon, Connecticut, Maryland, New York, Washington are all states that are looking into statewide options to the 401(k) system.
VIGELAND: Theresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School. For all the efforts in enhancing the retirement system on the state level, most reforms will come too late for people now in their late 30s and 40s, meaning people like Katharine Powers may have to revise their vision for retirement.
POWERS: We've been married for 26 years. It would be nice just go on road trips together and spend time alone together since we've had a child in the house for over 22 years now.
VIGELAND: And missing out on that part of life isn't just bad for the Powers. Analyst Teresa Ghilarducci says it's bad for all of us.
TERESA GHILARDUCCI: This idea of whether or not we are entitled to retirement is a great question. After the Great Depression, there was this idea that everybody deserves some time to themselves, to decide what they do with their time. They got the weekend, they got holidays, and they got retirement. And to me, that's one of the most precious periods of our life because we're going to die after that period, and we need some time to connect to not only the people that we love, but what psychologists call, we need a time to create a personal narrative about what our life meant.
VIGELAND: A concept of our golden years that increasingly feels like a mirage. Transcript provided by NPR, Copyright NPR.