• Hannah Boundy, CFA®, CFP®

Saving for Retirement in the 21st Century

The first corporate pension in the U.S. was offered by American Express in 1875. By 1975, 88% of those in the private sector had pension coverage through a defined benefit plan – a type of retirement plan that bases retirement benefits on several factors such as salary and employment history and then guarantees that benefit in retirement. As of 2005, that number had dropped to 33%. The decline of the defined benefit pension over the last several decades is due to a variety of factors including the high risk and costs associated with guaranteeing future benefits to a workforce that is living longer.

Today, many employers have replaced their defined benefit plans with defined contribution plans – mostly commonly the 401k. In doing so, they have shifted the burden of saving for retirement firmly onto the shoulders of employees. Now, instead of being able to count on your employer to replace some percentage of your income in retirement, you must choose to defer a portion of your income today in the hopes that you will have enough saved up when you choose to or, in some instances, are forced into retirement. Furthermore, not every employer offers a 401(k) plan, limiting the options and amounts available to workers for saving. In conjunction with an overburdened Social Security system, some have claimed there is a “Retirement Crisis” in the making.

In an article aptly titled Already Falling Short, Jennifer Erwin Brown, Manager of Research for the National Institute on Retirement Security notes that roughly two-thirds of working Millennials have nothing saved for retirement. This is in part because while two-thirds of Millennials work for an employer that offers a retirement plan, only about a third participate. One issue at hand may be that despite working for an employer that offers a plan, not all workers are eligible (for instance, they may work part-time). However, even if eligibility were improved, either through public policy or corporate choice, savings rates for those participating are still too low. One survey, conducted by Transamerica’s Center for Retirement Studies in 2015, found that the median retirement savings for someone in their 20s was $16,000. For someone in their 30s, the median was $45,000. While the total amount needed for retirement varies from person to person, one common rule of thumb is that you should have roughly one to two times your salary saved by your 30s to put you on track to have roughly ten times your salary by the time you retire. If you are making $100,000 when you retire, you would hope to have saved around $1 million.

One solution to this shift in retirement savings offered by Nobel winner and behavioral economist Richard Thaler is to encourage more employers to institute automatic savings. In sum, he notes that human beings, however well-intentioned, are prone to acting irrational and struggle with deferred gratification. In researching how we misbehave, he found that forced savings are often one of the most effective ways to solve the retirement gap. But since no one likes to be forced into doing things, another option Thaler offers is for employer-sponsored plans to require that we “opt-out” instead of “opt-in.” For most of us right now, the “opt-in” option is still more common, requiring us to be more diligent and assertive when it comes to saving for the future.

How then should we proceed? One easy first step is to simply educate yourself on what your options are. While the ideal rate of savings varies from one analyst to another (and at best, is a math-based opinion), it is a pretty commonly held belief that a good rate of savings is somewhere above 0%. Not only that, but the concept of compounding returns holds that over time, the money we’ve made in the past helps us make more money in the future and the longer you have to earn compounding returns, the better off you’ll be. Put in simpler terms: the sooner you start saving the better.

To this end, we’re excited to start offering Getting Started Workshops, the first of which will be held in Arvada, Colorado on September 14th with another in the works for Westlake Village in early 2020. In our efforts to remain grounded in education and empowerment, we hope to offer those in the early stages of retirement savings a short curriculum on how to get started in making the most of the benefits available to them. If you’d like to learn more or RSVP – you can do so from our Events page.

Brown, Jennifer Erin. “Millennials and Retirement - National Institute on ...” National Institute on Retirement Security. National Institute on Retirement Security, February 2018. https://www.nirsonline.org/wp-content/uploads/2018/02/Millennials-Report-1.pdf.

Collinson, Catherine. “Retirement Throughout the Ages: Expectations and Preparations of American Workers.” Transamerica Center for Retirement Studies. Transamerica, May 2015. https://www.transamericacenter.org/docs/default-source/resources/center-research/16th-annual/tcrs2015_sr_retirement_throughout_the_ages.pdf.

Munnell, Alicia H, et al. “WHY HAVE DEFINED BENEFIT PLANS SURVIVED IN THE PUBLIC SECTOR?” Center for Retirement Research at Boston College, Center for Retirement Research at Boston College, Dec. 2007, http://crr.bc.edu/wp-content/uploads/2007/12/slp_2.pdf.

Phipps, Melissa. “How The Pension Plan Was Born.” The Balance, The Balance, 28 Jan. 2019, https://www.thebalance.com/the-history-of-the-pension-plan-2894374.

Thaler, Richard H. Misbehaving. Place of publication not identified: Penguin Books, 2016.


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