undefined

8 minute read

The Retirement Crisis in America: How to Plan in the Face of Uncertainty

While we can hope that policymakers and employers will improve the retirement crisis, the only way to ensure your security is to take personal responsibility.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Retirement used to be something we looked forward to: a golden chapter during which you finally get to relax, have some financial stability, and check off things from your bucket list.

However, this vision is starting to fade for many Americans. What experts have dubbed 'The Retirement Crisis' is looming overhead. As the economy struggles to support an aging society, the financial security of millions of individuals is under threat. Left unaddressed, the crisis could have repercussions that span generations. While these headlines stir up anxiety, it is important to have hope. Trust & Will navigates the complex landscape of retirement, from what it used to be and what it is beginning to look like today, and addresses what to do in spite of the crisis: insights, solutions, and actionable steps to make your future feel more secure.

Retirement in America: Then & Now

The retirement savings system in the U.S. used to be made up of a golden trifecta:

1. Pension Plans: A pension plan is an employee benefit through which the employer will pay their employees fixed, regular amounts in their retirement. Typically, the pension is a reflection of the employee's length of employment and salary at the company.

2. Social Security: The Social Security Act of 1935 was introduced as a safety net for retirees and their dependents. Funded by taxes from current workers, the program provides monthly benefits to retirement-age individuals.

3. 401(k) Accounts: Introduced in the 1980s, 401(k) accounts allow employees to contribute a portion of their salary into an investment account for retirement savings. Employers may also match these contributions to further grow the employee's savings.

With these systems in place, Americans were more or less covered in retirement so that they could live comfortably. They could withdraw from the labor force completely and permanently, and expect to have enough funds to cover living expenses until they passed away.

Today, however, the retirement system doesn't look the same. Americans are having to take matters into their own hands to secure their own retirement -- which is not an easy task.

According to CNN, pension plans are essentially a thing of the past. In the 1980s, roughly half of employees in the private sector were covered by these defined-benefit plans. As recently as 2022, only 15 percent of workers had them. Gone are the days when you could simply work loyally for a company and have your retirement covered.

The Social Security system is collapsing as well. If you're an older adult right now, you may be in the last generation to be receiving this benefit. Social Security payments still provide income for a quarter of older adults, but without intervention, the trust fund is expected to be depleted by the mid-2030s. The fund is facing a 75-year deficit and politicians have not reached an agreement on how to fix it.

That leaves the 401(k). Almost 70 percent of workers in the private industry have access to this retirement savings account, but only 50 percent are using it. Policymakers have shifted the rules moving forward so that any companies offering a 401(k) plan will be required to automatically enroll their employees so that they are more likely to participate.

Saving for Retirement: It Isn't Easy

There are some things that are out of the general public's control, such as the disappearance of most pension plans and the depletion of the Social Security trust fund. While citizens should certainly weigh in on these matters, interventions would need to be made by the government and employers.

This leaves the onus that is left on individuals to save up for retirement, whether it be through a 401(k) or other type of retirement account.

Unfortunately, this is an uphill battle for most Americans. Here are some factors contributing to the retirement crisis:

  • Inadequate personal savings: A significant portion of the population is woefully underprepared for retirement, with savings and investment portfolios that fall short of target goals.

  • Rising cost of living: Partially due to inflation, the cost of living continues to rise. Many individuals report that most of their paycheck goes to basic needs such as housing, food, and clothing with little leftover to put in savings.

  • Rising healthcare costs: Medical expenses continue to outpace general inflation, becoming a significant financial burden, particularly for retirees.

  • Longer life expectancies: While the blessing of longer life comes with an increased cost of living, potentially depleting retirement funds faster than anticipated.

According to CBS News, the average working American believes they will need to have saved $1.46 million to retire comfortably. However, the harsh reality is that the average retirement account balance today amongst working Americans is $88,000. Note that this is an average; many surveys have found that many Americans have little to no savings.

How will Americans make up this gap by the time they retire? Frankly, no one really knows.

Take Eric Payne, a single father of two boys who was interviewed by CNN. He makes $80,000 per year -- the national average is around $60,000. On paper, he should be making a pretty good living for his family. However, the reality is that he is barely making ends meet. After paying for all essential expenses, there is little left to spare. Payne has less than $10,000 in retirement savings, and admits that he is "creating a problem for himself down the road." Unfortunately, there is not much he can do except focus on every dollar, something that feels like a "constant battle."

For Americans who do manage to save for retirement, many are prematurely dipping into their 401(k) funds for emergencies. Less than half of Americans can afford to cover an emergency costing $1,000 or more. Without emergency funds, the 401(k) is a source of funding in times of financial distress. On the other hand, this means that many Americans are depleting their retirement savings and facing heavy penalties for doing so prematurely.

Retirement Crisis is Impacting Everyone

If you are thinking about retirement and feeling hopeless, know that you are not alone.

For working professionals, they are struggling to balance today's financial demands while saving for the future. Many are forced to put retirement planning on the back burner, which in turn creates a steeper financial cliff in the long-run. To exacerbate matters, student loan debt and the rising cost of living is making it even hard to save for retirement, let alone an emergency fund.

For retirees, inadequate savings can lead to a significant reduction in quality of life or the inability to retire at all, necessitating continued work well into advanced age. The erosion of pensions also means a shift in the risk from employer to employee, who may not be best equipped to manage it effectively.

Retirement Woes during an Election Year

Understandably, retirement is one of the top policy issues on the minds of voters as they watch presidential campaigns before heading to polls this November.

Here are the stances and comments of some of the leading politicians (sourced from CNN):

  • Donald Trump suggested that he was open to making cuts to Social Security and Medicare, to which a spokesperson later clarified meant cuts to waste and not American entitlements.

  • The Biden administration enacted the SECURE 2.0 legislation, aimed at incentivizing employers to provide retirement plan benefits to their employees, thereby easing some of the obstacles to saving for retirement. Additionally, the administration put forth a proposal aimed at curbing excessive fees associated with retirement investments.

  • The Biden administration has also made efforts to provide some student loan debt relief, and debt forgiveness for some.

  • Senator Bernie Sanders has argued that companies need to bring back pension plans.

  • Individuals like Nikki Haley and Blackrock CEO Larry Fink are advocating for an increase in the retirement age.

If you pay attention to politics, then you'll likely be very keen to find out whether or not any presidential candidates have a stance on how to solve the retirement crisis that you agree with.

What You Can Do Today to Prepare for Tomorrow

There's no argument that the retirement crisis is daunting, whether you lean to the left, the right, or whatever your personal background may be. While we can hope that systemic change will be made to improve upon the situation, the onus right now is heavily on the individual to control what they can and prepare as best they can. The policy here is to aim for safety, and to not be sorry. Otherwise, our personal well-being could be in jeopardy as we age.

Here are some strategies and frameworks to strengthen your financial position and improve your chances of meeting your retirement goals:

Start Saving: Just Do It

  • Time is your biggest ally when it comes to growing your retirement savings. If you're at an age where putting your retirement savings on the back burner still feels somewhat acceptable: don't. Even if you can only afford to put $100 dollars per month away, do what it takes. Starting today will help your money grow so much more substantially then if you were to start 5 years from now.

  • Review your monthly cash flow and see where you can make some room to pay your future self more. Prioritize improving your cash flow so that you can gradually increase your retirement contributions, whether that looks like making more meals at home, canceling some subscriptions, starting a side hustle, or paying down debt.

  • If you have an employer, take advantage of any available sponsored retirement plans. Seek out an employer match to maximize your savings potential. Because the retirement crisis is so serious, you may even consider switching to an employer that offers better retirement benefits, or one of the few employers that still offer a pension plan. If you're self-employed, be sure to start your own retirement savings account and make monthly contributions. Consult a financial professional to find out about any available tax advantages.

  • If eligible, consider a health savings account (HSA) as a unique and tax-advantaged retirement savings vehicle.

Financial Decision-Making

  • Be mindful of how you allocate your savings and investments, ensuring a diversified portfolio that can weather different economic conditions.

  • Consider the timing of your Social Security benefits, as delaying can lead to higher monthly payouts.

  • Start thinking about how you might be able to secure sources of passive income for when you retire.

Leverage Retirement Planning Tools

  • Utilize retirement calculators to assess your current savings trajectory and adjust contributions and investments accordingly.

  • Consider long-term care insurance options as a safeguard against potentially devastating healthcare costs.

The Role of Estate Planning

  • Create a comprehensive estate plan through Trust & Will that aligns with your retirement goals and legacy aspirations.

  • Regularly review and update your estate plan to reflect changes in your financial situation or personal circumstances.

Political Participation

  • Review recent policy developments, such as the SECURE Act, which offers potential enhancements to retirement savings opportunities.

  • Pay attention to ongoing discussions about Social Security reform and the implications such changes could have on your retirement plans.

  • Vote. While you may feel like you don't have a voice when it comes to systemic change, you do. Be sure to register to vote, especially for the presidential election this year.

Adaptation in the Financial Sector

  • Stay informed on changes in the financial and insurance sectors, including new product offerings and shifts in the retirement advice industry.

  • Understand how technological advancements may provide new tools and platforms to help with retirement planning and financial management.

Take Personal Responsibility

  • Commit to regular financial reviews to track and adjust your retirement savings goals.

  • Educate yourself on financial literacy and engage with resources that can empower you to make informed decisions.

It's a Call to Action

It's important to remember that retirement planning isn't just about our individual future, but also about the collective impact on society. Businesses and policymakers still have time to turn this around. It's no secret that the nation will be looking to the presidential candidates this year to see what type of solutions are on the table. In the meantime, individuals also must take personal responsibility. 

While the current circumstances may feel unfair, it does not change the reality that the onus is currently on the individual to secure their own retirement. By staying informed, taking personal responsibility, and engaging with resources that are available, it is possible to create a more secure and stable retirement for ourselves, and for future generations.

At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement  options today!

Is there a question here we didn’t answer? Browse more topics in our learn center or chat with a live member support representative! 

Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.