By Steve Tepper, CFP®, MBA
It should come as no surprise to readers of our newsletter that most people have not saved enough for retirement. We reported several years ago that about 57% of baby boomers would run out of money within 20 years of retirement according to the Employee Benefit Research Institute (EBRI). I haven’t seen an update for that report, but I’m going to go out on a limb and guess the figures haven’t changed much.
The World Economic Forum has put the long-term outlook into focus, and it’s very bleak. By 2050, the combination of longer life spans, inadequate savings, and poor investment strategies will result in a $400 trillion retirement savings gap.
$400 trillion! That’s a Dr. Evil number because literally, that much money doesn’t exist in the world—it is about five times the size of the global economy today.
The figure was derived by starting with an assumption that a retiree would need a beginning retirement income of 70% of annual earnings before leaving the workplace.
The death of defined benefit plans (traditional pensions) is a big culprit for the bleak assessment. Once upon a time, you worked for an employer for 30 or 40 years and built up a pension (a fixed amount of monthly income for the rest of your life), which, combined with Social Security, would provide the income you needed to cover living expenses. But very few employers offer traditional pensions anymore, shifting instead to defined contribution plans (such as 401(k) plans).
Defined contribution plans (including IRAs) make up more than 50% of retirement assets worldwide, and compared with pension-type plans, they are riskier for investors. They usually require employees to “buy in” or make contributions through payroll deduction. Participation is not mandatory, so an employee can opt to save nothing for retirement. Sadly, many do just that. For those who do participate, they may find limited investment options, or may not understand their options, and usually, don’t have the option of professional investment management.
None of that was a concern under a classic pension plan, where contributions were made for all eligible employees by the employer, and assets were pooled together, which helped spread out risk and allowed for low-cost management by a financial advisor required to act as a fiduciary to the plan.
The World Economic Forum reported that the savings gap is growing by about $3 trillion per year in the U.S. and could climb by as much as 7% in China and 10% in India, where populations are aging more rapidly and more people work in what they call “informal sectors.” I’m taking that to mean “off the books” jobs that don’t pay into retirement plans.
It is clear under the current system that individuals need to take responsibility for the success of their lifelong financial plans by investing as much as possible toward retirement during their working years and hiring the services of a professional financial advisor who will serve as a fiduciary and act in their best interest in managing their money.
Past performance is no guarantee of future results. There is no guarantee an investment strategy will be successful. Diversification does not eliminate the risk of market loss. Investing risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.