Navigating the Retirement Crisis: A Dual Challenge of Finance and Wellbeing

Money is not just currency; it's an emotional load we carry, shaped by experiences from as early as childhood. In my role as a financial wellness coach, I've observed the profound impact that financial stress can have on mental health. Introducing the topic of retirement planning in a household already struggling financially can significantly heighten anxiety and depression. This crisis calls for an urgent shift in our approach to financial education, focusing on an action-based budget today that ensures a dignified future.

The Current Retirement Dilemma: A Broader Perspective

Through conversations with defined benefit experts and extensive research, a clear, concerning image of America's retirement readiness—or lack thereof—emerges. We stand on the brink of the retirement crisis, with more than half of us unprepared for retirement and lacking adequate savings to sustain our standard of living. As private pensions dwindle and the future of Social Security hangs in the balance, we must ask ourselves: How did we get here, and what steps can we take now, irrespective of potential legislative solutions?

Understanding the Shift: From Pensions to Personal Responsibility

The traditional 'three-legged stool' approach to retirement planning—pension plans - defined benefit or contribution plans, Social Security benefits, and personal savings—has undergone significant transformation. Originally, defined benefit pensions, which pay retirement benefits in the form of a lifetime annuity, covered a substantial portion of post-retirement needs. Pension coverage, which started in the 1900s, consistently expanded until around 1970 and covered about half of private sector workers until the mid-1980s. 

In the mid-1980s, many employers shifted to defined contribution plans like 401(k)s due to regulatory and cost pressures. The 401(k) appealed to employees and employers. Employees could make tax-deductible contributions and gain control of the retirement planning. The workforce was more mobile, and workers could take their 401(k) accumulations with them as they moved from job to job. From the employer's perspective, 401(k) plans offered a form of pension that workers appreciated and eliminated the long-term risk to employers of funding lifetime retirement benefits and the near-term risk of large market fluctuations. 401(k) also shifted the management costs and risks onto individuals. 

A Closer Look at Today's Retirement Savings Landscape

Here is the thing: in the 1980s, when 401(k) plans began to spread rapidly, they were viewed as a supplement to the employer-funded defined benefit pension. Since participants were presumed to have their primary retirement income covered, they were given discretion, including whether to participate, how much to contribute, how to invest, and when to withdraw funds. Today, defined-benefit pension plans are nearly extinct, with only 15% of private sector workers covered by defined-benefit pension plans. And despite the availability of 401(k) plans, a staggering number of Americans have savings that fall short of their future needs. The Federal Reserve's 2022 Survey of Consumer Finances paints a stark picture, summarizing that only half of private industry workers who could contribute to a 401(k) do so. The median savings balances have a typical median of $87,000, which is woefully inadequate for supplementing Social Security in retirement. According to Vanguard Group data, the typical 55- to 64-year-old had saved just $71,000 in a 401(k) plan as of 2022. More bad news is a key finding by the Federal Reserve Bank of New York, which found that nearly half of workers who had a 401(k) at a previous job reported taking a lump sum payment rather than rolling it into a tax-qualified plan. Unfortunately, many workers, particularly those with low incomes, are not using 401(k) plans to save for retirement. So here is the problem: 401(k)s have become the primary retirement plan for most individuals. However, participation rates in 401(k) plans are low, contributions are modest, and substantial pre-retirement distributions are allocated for purposes other than retirement savings. What seemed like a great plan has backfired. This shift not only placed the burden of retirement planning on individuals but also introduced significant risks and uncertainties exacerbated by the mobile nature of the modern workforce.

Understanding Social Security's Limitations

Because most Americans have competing financial priorities, they are not saving for older age. Social Security by design was intended to replace 40% of a person's working income, yet 1/3 of baby boomers will rely on their social security benefit for about 90% of their retirement income, according to Social Security Agency surveys. Social Security can't replace the pre-retirement standard of living, nor was it intended to replace it. With Social Security projected to deplete by the mid-2030s and political deadlock preventing reform, the role of Social Security as a reliable income source is increasingly precarious.

Is the Traditional Retirement Planning Model Still Viable?

Increasingly, the concept of the three-legged stool is questioned. In a recent CNBC International Your Money Financial Security survey of 500 people, more than half (53%) said they are behind schedule in retirement planning and savings. Experts like Teresa Ghilarducci argue that this model is, at best, shaky. Today's reality suggests a new model might include working longer, reforming Social Security, increasing 401(k) contributions, and leveraging home equity. The Urban Institute's article "This is Not Your Parents' Retirement" states that starting in 2020, Generation X received 37 percent of their income from Social Security when they reached 67 years old; about 24 percent comes from working, 22 percent from personal assets (mainly owning a home); and 18 percent from an employer retirement plan. So, to give you a visual representation of the three-legged stool:

• The social security leg is 37 inches.
• The earnings formwork leg is 24 inches.
• The personal asset leg is 22 inches.
• The employer-retirement plan is 18 inches.

The balance among these elements suggests a very wobbly stool and points to the need to reevaluate how we plan for retirement.

Bridging the Gap: Financial Wellness as a Priority

The math shows us the crux of the retirement crisis is the substantial gap between the income we can currently expect from our retirement programs like Social Security, 401(k)s, and, for the few lucky ones, defined benefit plans and our living needs. But the retirement savings crisis isn't just a matter of numbers; it's a pervasive source of stress affecting our mental and emotional health. Larry Fink, CEO of BlackRock, wrote in his 2024 letter to investors, "We focus a tremendous effort on helping people live longer lives. But not even a fraction of that effort is spent helping people afford those extra years." While systemic issues need addressing, individuals have the power to change their financial destiny through informed actions and a new perspective on money management. As any good relationship therapist will tell you, you control your actions, not the other party's. 

Integrating Financial Wellness Into Retirement Planning

Understanding the depth of the retirement crisis is daunting, especially if facing the financial pressures of living paycheck to paycheck. Avoiding looking at your accurate financial picture is typical and not entirely your fault. Our brain, wired to protect us, does its job by avoiding the negative feelings associated with finances or budgeting. However, shifting our perspective from reactive to proactive means we can transcend the habits that bind us to financial instability despite facing a daunting retirement crisis. Financial wellness is about managing money effectively today and securing a stable and fulfilling future. By embracing principles of financial wellness such as disciplined saving, active budget management, strategic debt reduction, and income diversification, individuals can build a robust defense against the retirement crisis.

Each of these elements serves as a cornerstone in constructing a secure retirement:

Early and Consistent Saving: 

Implementing a consistent savings plan that includes short—and long-term quality-of-life savings goals is never too late. Things like a family vacation or a new car come to mind, but retirement needs to be a long-term savings goal. The earlier you begin your savings practice, the better, as you utilize the time value of money, significantly enhancing your savings reserves, especially retirement funds. However, consistency is the key to any successful savings plan. 

Action-Based Budgeting: 

An action-based budgeting system ensures that you meet current financial obligations and steadily contribute to your retirement funds. As an ancillary benefit, you catch sneaky reoccurring charges for abandoned or forgotten auto-renewable applications. 

Debt Reduction: 

By prioritizing debt management, more resources can be redirected toward retirement savings, reducing financial stress in later years.

Income Diversification: 

Cultivating multiple income streams can cushion against unexpected economic shifts, provide extra funds to be funneled into retirement accounts, and be a post-retirement passion.

Empowering Change in Financial Behavior

As financial wellness improves, so does one's capacity to contribute towards a retirement fund, diminishing the likelihood of facing a personal retirement crisis. This proactive approach secures financial futures and enhances overall life satisfaction by reducing money-related stress and anxiety, thus contributing to better mental and emotional health throughout one's working years and retirement. Financial wellness is about planning for today's needs and quality of life goals that include preparing for the future; it's also about transforming our relationship with money today and enabling us to live with security and dignity in retirement. 

The power to change our financial future lies within our grasp. Let's embrace this challenge together, creating a plan that supports our financial needs and overall wellbeing. Committing to your finances can shift today's money stress and give you a more stable foundation for retirement. 

References:

401(k) plans have never been hotter. That's changing the stock market – The Wealthiest Investor. https://thewealthiestinvestor.com/latest-news/401k-plans-have-never-been-hotter-thats-changing-the-stock-market/

53% of Americans surveyed feel they are behind on retirement planning and savings, CNBC poll finds. https://www.cnbc.com/2024/04/03/many-americans-feel-behind-on-retirement-planning-cnbc-survey-finds/

The Pension: That Rare Retirement Benefit Gets a Fresh Look. https://www.nytimes.com/2023/11/24/business/pension-retirement/

401(k)/IRA Holdings in 2022: An Update from the SCF. https://crr.bc.edu/401k-ira-holdings-in-2022-an-update-from-the-scf/

How Workers Use 401(k) Plans: The Participation, Contribution, and Withdrawal Decisions. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr38.pdf

Larry Fink's 2024 Annual Chairman's Letter to Investors. https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter

Guilarducci, Teresa. 2024. Work, Retire, Repeat: The Uncertainty of Retirement In The New Economy.

Ellis, Charles. D., Munnell, Alicia. H., Eschtruth, Andrew. D. 2014. Falling Short: The Comming Retirement Crisis and What To Do About It.

America's New Age of Retirement Anxiety. https://www.businessinsider.com/retirement-social-security-gen-z-millennials-uncertainty-fears-pensions-2024/

This Is Not Your Parents' Retirement: Comparing Retirement Income Across Generations. https://www.urban.org/research/publication/not-your-parents-retirement-comparing-retirement-income-across-generations