I read an interesting white paper recently from the American Enterprise Institute that looked at “What Is Happening In Retirement Planning Today?” The paper was well-researched and stands as a bit of a contrast to the tangle of dark personal finance headlines that you often see in the in the paper and online. While the media seems intent on frightening working-age Americans and many analysts warn of a retirement crisis, retirees themselves seem overwhelmingly positive regarding their financial status and overall quality of life. Additionally, employees and employers seem more committed to a financially successful retirement than ever before.
Here are 8 common retirement myths debunked …
Myth: Student Loans Hold Millennials Back From Starting Retirement Savings
- Data from the Annual Transamerica Retirement Survey of Workers (2015) shows that Millennials are starting their savings for retirement MUCH earlier than other generations. While they may have more student loan debt, they are still, on average, much earlier than previous generations. Them median age they began savings is 23 years old – which is 5 years younger than Gen Xers and an amazing 11 years older than Boomers did. I know one younger friend who said he started when he was 15!
Myth: Millennials Aren’t Able To Delay Gratification Well
- Again, data from the same Transamerica study show that Millennials are also saving at very strong rates. Their median contribution rate is 8% of income, which is ahead of Gen Xers (7%) and on par with Boomers (8%). Given that they are saving a solid rates AND starting so much earlier, I would feel pretty good about their prospects. The study’s results match what I see as I talk to people – they are very astute financially and focused on their financial independence.
Myth: This Generation of Americans Can’t Save As Much As Their Parents Did
- After the dot-com bubble pop, the impact of the 9/11, and the shock of the Great Recession, you would think that this generation would be cash-strapped versus those that retired in the prosperous 1960s, 1970s, or go-go 1980s. However, a report from the Department of Labor shows that retirement savings rates have grown from 6.0% in 1975 to 8.3% in 2013. That change represents billions of dollars voluntarily committed annually to planning for retirement. I think that as attitudes have changed from “my company will take care of me” (pensions) to ‘I have to take care of myself” (401k), people have become more financially literate and more committed to saving.
Myth: Companies Have Pushed The Burden Of Retirement Savings To Employees
- This myth seems to make sense – companies have stopped traditional defined benefit plans and replaced them with 401k plans that put the onus on workers to save for themselves. Fact is, few people – only about 35% of workers in the 1960s and 1970s – ever qualified for those gold standard pensions in the first place. Many more workers are now participating in 401k plans and employers are contributing matching dollars. A report from the Department of Labor shows that company contributions to retirement plans (as % income) have more than TRIPLED – from 2.0% in 1975 to 6.4% in 2013.
Myth: Few People Have Saved Enough To Replace A Fraction of Their Pre-Retirement Income
- Financial experts don’t always agree on what % of your pre-retirement income you should save to replace. Combined with pensions and social security, most experts advise saving enough to be able to replace between 75-100% of pre-retirement income. Data from the SSA MINT study shows that most are well-set against this goal. A majority (55%) are expected to have more than 100% of replacement income (20% are at 200%) with another 35% having between 50%-100%. Just under 10% are said to have less than 50% of replacement income.
Myth: Financial Concerns Will Increase In Retirement
- Many people worry that as they grow older and retire that the cost of everything will become more of a concern. A Census Bureau study on Health & Retirement shows that these concerns are often misplaced. While 41% of Americans expected to see a decline in lifestyle in retirement, 85% of them later reported their lifestyle spending to be “better” or “about the same”. I would guess that it is difficult for people to individually project the advances in society and technology that make life better and less expensive over the decades.
Myth: One’s Retirement Lifestyle Is Less Comfortable Than In The Past
- A 2015 Gallup study showed that 79% of retirees were living a financially comfortable lifestyle. This number was equal to retirees that were polled 15 years earlier. Despite the economic hardships since the dot.com bubble burst in 2000, retirees are still very positive about their individual experience.
Myth: Net Worth Declines In Retirement As People ‘Spend To The End’
- Everyone hopes to make their money last in retirement and people worry that they might run out of money. Nonetheless, a longitudinal study completed by American Enterprise Institute showed that people’s net worth tends to go UP in retirement, not the other way. The study showed net worth by age over time: net worth at age 90 was about 25% higher than the same people had at age 65 (in constant dollars).
As you look at all of these myths and the angst that often accompanies them, the message is not to panic. Americans do not seem to be facing a retirement crisis – in fact, each generation seems to be planning and preparing in a more sophisticated way than ever before.
While company traditional pensions may be going the way of the dinosaur, they have been replaced by more inclusive savings approaches that are well supported by both employers and employees. There are certainly challenges with the long-term viability of social security, but it is better to focus on that individually than claim the sky is falling across the board.
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