How do you pay for something when you don’t know how much it will cost or how long it will take? This is the current US pension system and many experts think it is broken.
Is the American dream of retirement unrealistic at a time when financing falls entirely on the shoulders of the average person?
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A lack of financial literacy, coupled with stagnant wages and longer lives, have made saving for retirement insurmountable for many.
Read: Hardship withdrawals from 401(k) plans hit nearly 40% — as savers fight to save their homes
Take this statistic that illustrates how confused many people are about their 401(k) investments: According to a study by Principal Financial Group, 59% of respondents who thought they were contributing to their 401(k) in they really weren’t.
“The American pension system is ridiculous. That puts a lot of burden on workers,” said Teresa Ghilarducci, New School professor of economics and director of the university’s Schwartz Center for Economic Policy Analysis. “Most employers don’t contribute to their employees’ retirement accounts, and most people miss out on the benefits of compound interest by not starting to save early.
Read: Millionaires’ 401(k)s grew 43% last year — here’s how long it took to reach $1 million
“Workers must decide how much to invest, where to invest, avoid costly fees and conflicting advice, and estimate when they and their spouse will die to make their savings last for the rest of their lives . It’s almost impossible,” added Ghilarducci.
In another data point showing the disconnect between savings goals and reality, Schroders’ 2024 US Retirement Survey found that Americans with workplace retirement plans believe they need $1.2 million to retire comfortably. However, 46% expect to have less than $500,000 in retirement savings, including 23% who anticipate having less than $250,000.
Larry Fink, chairman and chief executive of investment management firm BlackRock, said earlier this year that the U.S. pension crisis is “so large and urgent” that government and corporate leaders must stop business as usual and address the problem so that future generations can grow up with dignity.
“In America today, the retirement message that government and companies tell their workers is effectively, ‘You’re on your own.'” And before my generation disappears entirely from corporate and political leadership positions, we have an obligation to let’s change that,” said Fink.
Read: BlackRock’s Larry Fink calls for urgent national action on retirement crisis
Workers who don’t understand how well they’re investing in their retirement accounts could have long-term consequences if Americans fail to save enough to see them through their retirement years.
“Every month and year [that] employees not contributing requires them to play catch-up and takes away the biggest advantage they have in saving for retirement: time,” said Chris Littlefield, president of retirement and income solutions for Principal Financial Group .
“With financial pressures mounting, it’s more important than ever that employees have a plan for their retirement,” Littlefield said. “This plan starts with understanding the level of income they will need in retirement to maintain their lifestyle and should include methods for regularly tracking progress.
“If they mistakenly believe they are saving, every pay period in which they are not contributing to their workplace retirement plan makes it more challenging for them to achieve retirement success,” he added. .
Littlefield said there may be several factors contributing to the misunderstanding about enrollment and contributions — one being differences in plan designs offered by employers.
American workers average more than 12 jobs during their careers, according to the US Bureau of Labor Statistics. This means that they will come across a variety of retirement plans; some have automatic registration, while others require employees to register themselves.
“Unfortunately, these differences can result in confusion and uncertainty among employees, who may assume that automatic enrollment in a previous employer’s pension plan is common practice for future employers,” Littlefield said.
In addition to differences in how employees enroll in different employer plans, the proliferation of direct deposit has made it more difficult for employees to see and review the deductions being made from their paychecks, Littlefield noted.
A good rule of thumb for the average working American is to save at least 15% of their annual income when including the employer match—but very few employers offer automatic deferrals and matching contribution rates that produce that minimum recommended amount. said Littlefield.
According to Vanguard’s new “How America Saves” report, participants’ average deferral rate was 7.4% of their annual salary. When combined with employer contributions, the average total participant savings rate continued the all-time high of 11.7% reached a year ago.
However, up to 28% of Americans have nothing saved for their retirement, 39% are not contributing to a retirement fund, and another 30% don’t think they’ll ever be able to retire, according to a latest GoBankingRates survey.
Read: Zero. That’s how much 28% of the country has saved for retirement.
As of the first quarter of this year, the average 401(k) account had a balance of $125,900, according to Fidelity Investments. But the average 401(k) balance was $28,900, Fidelity noted.
While 69% of private industry workers have access to an employer-based retirement plan, only 52% participate, according to the US Bureau of Labor Statistics.
“The financial system is designed to allow us to fail,” said Steven Charlton, founder of financial advisory firm Wisdom Financial and a certified financial fiduciary.
“Financial education should simply be provided to everyone. Of course, we also have a responsibility to ourselves, but financial education should be a starting point,” said Charlton. “There is a problem in the system. Unbiased financial education is hard to find.
“The financial advisor has to want to devote unpaid time to education, and that’s not happening a lot,” he added.
While some of the responsibility falls on the individual, the fact remains that the government, schools and employers also play a role in financial education.
“The American retirement system is voluntary, self-directed, and commercial. It’s more suited to spreadsheet robots than real human beings,” Ghilarducci said.
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