In a Wall Street Journal article Retiring Boomers Find 401(k) Plans Fall Short many issues were brought up regarding the challenges facing boomers saving for retirement.
How Serious is the 401(k) Shortfalls?
While many people know they are coming up short when it comes to their retirement savings, this is the most recent article to explain how sever the shortfall has become.
- Heads of household in their early 60′s (age 60 to 62) with a 401k plan have less than 25% of what is needed in their account to maintain their standard of living.
- Just 8% of households approaching retirement have enough in their 401k to cover the 85% of their working income not covered by Social Security.
Boomers are first the generation to rely on 401(k) plans for retirement, with about 60% of households nearing retirement age having 401(k) type retirement accounts. However, even people who followed the rules and contributed to these plans are finding they are coming up short. Part of this is because returns have been lower during the 2007-2009 financial crisis. However, this is a best case scenario.
Many people have also had to deal with job loss, meaning they stopped contributing to their 401(k) plans or may have shifted to jobs without 401(k) plans. In addition, about 39% of all Americans have been foreclosed upon, unemployed, underwater on a mortgage, or behind more than two months on a mortgage. This means they did not have the disposable income to contribute to their retirement accounts. Finally, the shortfalls also do not factor in inflation, which would further eat into income from a 401(k).
To counter act these shortfalls, many boomers are looking at:
- postponing retirement (working into their 60’s and 70’s)
- working part-time in retirement
- moving to cheaper housing
- buying less-expensive food
- cutting back on travel
- taking bigger risks with investments
People who have more time until retirement should try to save more and save earlier. For example, now experts are recommending saving 12 – 15% your yearly income, including your employers contribution, instead of 9 – 12%. Also, it may make more sense to focus on saving for retirement instead of trying to pay off a house or paying for your children’s education.
In addition to being more proactive, younger workers should look at ways to make sure their savings rates could replace Social Security and pensions, just in case. Right now Social Security may provide as much as 40% of pre-retirement income, and just under 50% of retirees are expecting pension income of a median $26,500 a year. If these sources of retirement income are limited in the future, individuals will be dealing with an even larger savings gap.