Why We Need To Plan For Retirement In The United States

Retirement planning is, for many people in the United States, the single biggest financial hurdle we face. According to the National Institute on Retirement Security, 67% of Americans say the United States faces a retirement crisis. Almost two-thirds of Generation X and Millennials worry about not being financially secure in retirement. Let’s explore some of the reasons why this concern could be growing, some history of retirement in the United States, and some considerations for people planning for retirement.

Income For Life

First, let us look at the past landscape of retirement for individuals, and how that’s changing. In the last 90 years in the United States, many relied on a pension for their retirement. A pension is an obligation by some entity to pay out an income to an individual for that individual’s entire life.

Pensions are usually calculated based on income, number of years of work, and an actuarial calculation of how long the individual is expected to live, plus some assumed adjustment for cost of living. When I ask people about their parents’ retirement, many say something like, “My dad worked at the same company for 30 years and retired at 60 with a pension that he could live off of for the rest of his life.” Much of the onus historically not been on the individual to provide for their own financial security in retirement.

One of the first pensions in the United States, Social Security, was invented essentially as insurance against living too long. Social Security benefits first came out in 1935 when the average life expectancy for a man was 59.9 and for a woman was 63.9 . You were basically expected to drop dead once you reached what we know as retirement age today. If you happened to live too long, the government would then make sure that you did not have to eat dog food or live on the streets.

Longevity

As we began to live longer, Social Security had to make some changes to remain solvent. Now, in the United States, current life expectancy is 81.65 for women and 76.61 for men. There have been shifting targets for the consideration of full retirement age and without any changes to the system, Social Security is estimated to be insolvent by 2035. Some of the best economist minds have been on the case for a while and have solutions that will result in solvency. However, these solutions will need to reach bipartisan political backing and would potentially lead to some short-term financial pain. Ultimately, I do not believe that Social Security will disappear in 2035 but I do help people consider and prepare for the possibility that it may look a little different than the current projections.

Many firefighters, police officers, teachers, and other public sector workers are still set to receive pensions in the future. But the reality of the situation is that we saw many of those pension benefits reduced in the early 2010s and most employers do not offer pension programs to their employees. The number of people in the United States with a pension has gone down by nearly half from 1980 to 2008. Even since 2008, dozens of large companies have been performing pension buyouts to get the obligation off their books.

I know a lot of people who are exasperated by the perceived lack of consistency and reliability of pensions and Social Security. The people I have spoken with say things like, “This thing has been mismanaged,” and “I have very little faith that it will pay out.” The truth is that actuarial calculations are not perfect and there are a lot of moving parts involved. Pensions are a delicate balance between managing investment returns, guessing at population growth, and guessing when people are going to die.

The Math Isn’t Perfect

For the most part, Social Security and other pensions operate by having those currently working help fund those currently retired. Ideally, we would have a steadily growing population where there are always more people working than people retired. However, population growth is not linear. Birth rates are dropping. Generation X has a smaller population than the Baby Boomers and Generation Z has fewer people than Millennials. We cannot simply depend on the next generation to fund this generation’s retirement.

So, that is where we are today. It is largely our own responsibility to ensure our financial security in retirement. Because the basics of investing, compounding interest, budgeting, and taxation were not widely taught in school, this can be a scary prospect for many people. It is important for people overcome this and to work with qualified financial professionals or work to educate themselves. The great news is that it’s never too late to start.

Conclusion

In recent history, employers and the government have seen pension systems under great stress. It is now our responsibility to plan the best we can based on our needs, understanding that things can change. Retirement planning does not have to be this scary thing looming over you if you start making small steps today. If you need guidance for going through this thought process or seeing how you are progressing, I recommend speaking with a qualified financial professional.

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