Frankly, not a lot. Back in 1965, Roger Daltrey belted out that iconic line from the song My Generation - “I hope I die before I get old.” It’s certainly not much of a retirement strategy. The fact is, today, we are living longer and more of the responsibility for funding retirement is being put on the individuals shoulders. Let’s take a look at the retirement landscape and identify what banks, credit unions, and fintechs can and should do to help drive this aspect of financial wellness.
The last 40+ years have witnessed fundamental change in what, for most people, are the three main pillars of the U.S. retirement system: social security, employer sponsored plans, individual savings.
Social Security funding
An aging population coupled with an 80-year low for population growth in the US1 means fewer workers funding each retiree. In 1950, 16 workers funded each retiree.2 That number dropped to 3 workers for every retiree in 2015 and is projected to be 2:1 by 2035.3 The latest report from the Government Accountability Office (GAO) projects that the Social Security funding source will only be sufficient to pay 77% of scheduled benefits by 2034.3
Employer Sponsored Plans
Similarly, employer sponsored plans are witnessing significant changes. Simply put, employer benefits have moved away from offering defined benefits (i.e. plans that guarantee a given amount of monthly income in retirement for life and place the investment and longevity risk on the plan provider) to defined contribution plans ( e.g. 401(k) plans, which place the investment and longevity risk on individual employees, asking them to choose their own retirement investments with no guaranteed minimum or maximum benefits. Employees assume the risk of both not investing well and outliving their savings.)3
Worryingly, for those employees who are fortunate enough to have a defined benefit plan, the Pension Benefit Guaranty Corporation (think of them as the FDIC for Defined Benefit Pension plans) is $54B in the red and highly likely to be insolvent for the multiemployer program by 2025.3
Individuals’ savings—the third pillar—may be constrained by economic trends such as low real-wage growth and growing out-of-pocket health care costs, as well as increased longevity. The life expectancy in 1965 when “My Generation” was released was 66.8 for men and 73.7 for women.4 Today, that has increased to 77.5 and 82 respectively. (Although, sadly, despite the macro increase in longevity, the last 3 years have seen a decrease in life expectancy in the US driven by opioid abuse and suicides).5 Overall, these challenges can put individuals at greater risk of outliving their savings and fiscal pressures on government programs will likely grow.
The macro shift of putting more responsibility on the individual may seem sensible, but in practice the double whammy of a lack of financial literacy, and the temptation to defer getting started means many individuals are not on track for a happy retirement.
First of all, 26% of adults have no forms of retirement savings at all. Research shows that of those who are saving for retirement, 36% feel they are on track, 44% say they’re not on track, and the rest are not sure.6 (It should be noted that in this survey individuals subjectively decide for themselves how much they think they will need.)
Finally, medical bills are a lottery. Despite the fact that most Americans will be enrolled in Medicare from age 65, it doesn't cover certain long-term chronic health care expenses. The average person will incur an average of $122,000 in medical costs between the time they’re 70 and when they die — and it will mostly have been paid out-of-pocket. Around 5% of people will be hit with out-of-pocket medical bills of more than $300,000. And 1% will see their medical bills total more than $600,000.7
So what can we do about it?
Talk to most retirees and you’ll hear a version of the sentiment that they wish they had been better educated about retirement savings and started saving for retirement sooner.
What Individuals can do:
Take the time to better understand what you should do now for an event that may be many years out. As a starter, compare your retirement savings to your peer group and contribute accordingly.
Understand the power of compounding interest. In our Roger Daltrey example, let’s say he had saved just $500 a year since 1965, and his pension had performed similar to the S&P, his 401(K) would be worth over $1 million dollars in his retirement.
Utilize your employer match program (or move to an employer who offers one.) Data from Vanguard suggest that while 64% of plan participants contribute at least enough to qualify for the maximum employer match, over one-third of plan participants are not contributing enough to benefit from this free money.8 According to Fidelity, a common program would see the employer match 4% to every 6% the employee saved.8 So in our Daltrey example, while his own savings would balloon to $1,069, 905 over his 50 year working life, his employer match would add another $713,270. Make sure you maximize your employer match!
What the Government can do:
Legislation known as the SECURE act (Setting Every Community Up for Retirement Enhancement Act) is intended to expand opportunities for Americans to save for retirement. There are almost 30 provisions, but some of my favorites include improving access for smaller employers to offer retirement plans, increase annuity options, increase the minimum distribution age, remove age limits on contributions and penalty free distributions for birth/adoption. The cynics worry that the Senate will tie this bi-partisan bill with adjacent requests that may sink the bill.
Banks & Credit Unions:
If ever there was an opportunity for financial institutions to be true advocates for the consumer, this is it. Information about retirement savings should be included in understanding consumers financial status through their various life stages, and offering the tools and advice that helps them become financially stronger. It should also be a candidate for how to extract value from the many branches that are witnessing declining foot traffic and transactions. [see bank branches infographic]
- Finstrong: a tool that helps your employees and your customers understand what is important in their life, helps them set goals, and provides them with a financial wellness philosophy that will help them navigate their financial life.
- MoneyMap with Pulse: AI-driven financial guidance enables banks and credit unions to engage consumers with real-time, personalized “nudges” that helps them improve their financial decision making and financial well-being.
- Kids savings apps: Tools that help children get started early with financial literacy by utilizing the fun of mobile phones with the gamification of earning and saving.