Last week we blogged about how hard it is for many Americans to save for retirement. The struggle is real, and we aren’t the only ones talking about it. In fact, by many reports, it’s only getting worse. Here’s why.
One of the main reasons retirement planning is hard is the fact that more and more employees are not offered benefits through the workplace. Gone are the days our grandparents enjoyed, when big corporations offered sizeable pension or 401(k) plans and with generous matching contributions to boot. These accounts were structured for those days—the good old days—when employees could expect longevity in the corporate world and increased benefits as time went by.
For the most part, for the average American—those days are over.
Nowadays, many companies, especially small ones with less than 100 employees, don’t offer retirement benefits at all because the cost of doing so can be overwhelming. Additionally, quite a hefty number of companies have increased their part-time employee base, which, in some cases and depending on the number of hours they work, makes those employees not eligible to contribute to employer-sponsored plans. If employers do offer benefits to their part-timers, the packages may be limited and while participants gain a bit of pre-tax savings, the bottom line is—it’s not nearly enough.
Add to the mix that a growing number of Americans are working for these smaller companies, who thankfully provided two-thirds of the overall new jobs last year, but offer no employee benefits—and you can easily see why the lack of employer-sponsored plans affects many.
Especially when retirement needs have actually grown over the past few decades:
Real interest rates are clearly not what they used to be, meaning the income gained from interest now does not come close to that gained at past rates—equating to less retirement income earned overall.
We’ve seen continual decreased Social Security benefits, and the age to begin receiving full benefits was raised to 67. The monthly percentage of benefits that are paid doesn’t quite cover the living costs retirees face, especially for those who currently enjoy higher incomes than the mid to lower-income brackets.
Health care, so critical to retirees, has increased exponentially and there’s no end in sight. To top it all off, (can you believe it?) we’re living longer! All of these factors play a huge part in the amount of income needed to retire somewhat comfortably—if at all.
Of course, there are options for savings besides workplace plans. However, even when the average American owns an individual account and maxes out their contribution limits every year—the cash they end up with at retirement age is still not enough in most cases to sustain them through retirement. Investments may be unfruitful or suffer an infamous Wall Street hit. The most dedicated and consistent savers face challenges that can be quite hard to overcome, and furthermore, it all depends on how much they’re able to save and invest.
Even the government-backed myRA accounts established to serve low and middle-income brackets have their drawbacks. These plans are structured much like the private sector Roth IRA. But, you can only contribute if your yearly household income is below $129,000 (single) or $191,000 (married). The interest rate earned here is low, and the account balance cannot exceed $15,000. When (and if) it does, the funds must be rolled over into a regular Roth IRA if you wish to continue earning retirement income.
It is important to note that even though people can open individual retirement plans of their own, such as traditional or Roth IRAs, and individual 401(k) plans, a vast number just don’t. In fact, the IRS reports that only 8 percent of those eligible to contribute to individual plans did so in the year 2010.
So, the lack of availability of 401(k) plans in the workplace may very well be a crisis, but the current emphasis on how critical retirement planning is needs to be recognized as a contributing factor, as well. If only 8 percent of those eligible are participating in individual plans—regardless of what’s offered in the workplace—what does that say? Sure, some people genuinely cannot afford to save, but many can. It just needs to become a priority. Priority Number One.
If you have any questions about this article or want to learn how self-directed IRAs can add diversity in your retirement portfolio, please request your free consultation.