Roddy Marino, CIMA, Executive Vice President
National Accounts & Distribution
It’s National Retirement Security Week!
Doesn’t sounds familiar? You’re not the only one.
This week kicks off the sixth year celebration of National Retirement Security Week (formally National Save for Retirement Week), sponsored by the National Association of Government Defined Contribution Administrators (NAGDCA). While this is not a Hallmark-holiday, this important week marks a national effort to raise public awareness of the importance of saving for retirement. The goals of this week are to:
- encourage employees to save and participate in their employee-sponsored retirement plans
- educate employees about how saving for retirement is crucial to security during retirement years
- increase awareness of the various retirement saving options
With the American life expectancy currently at 78.8 years1 and children born today expecting that nearly one-third of their contemporaries may live to see 100 years of age2, we are living lives with greater comfort and more free time than any other point in history. It is truly an incredible time to be alive, but even the best advances can have unintended complications. Such is the case with ever-increasing longevity and the reality of preparing for a retirement of unprecedented length. Successful retirement planning requires a great deal of forethought, tolerance for uncertainty and consistently delayed gratification. This can be challenging for some facing retirement because individuals must invest in risk assets if they are to retire comfortably and most individuals are emotionally and psychologically ill equipped to invest in risk assets.
So, why must you invest if you are to retire? As of today, the median wage in the U.S. is $26,695 and the median household income is $50,500. Let us suppose for illustrative purposes, however, that you are four times as clever as average and have managed to secure a comfortable annual salary of $100,000. Let us further suppose you set aside 10% of your gross income each year until the first day of your retirement. Assuming you begin saving at age 25 and retire at age 65, your efforts will have yielded a nest egg totaling $400,000.
While $400,000 may seem like a decent sum of money, it hardly provides much for someone who could easily live another 30 years in retirement. At $13,333 per year, you would be living near the poverty line by today’s math, to say nothing of how dramatically inflation would have eroded the purchasing power of that figure 40 years on.
If we turn back the clock 40 years from now, we see that roughly $90,000 in 1975 money would get you $400,000 in purchasing power in today’s dollars. A little back of the napkin math tells us that even though $400,000 may seem alright today, we will need more like $1.5 million 40 years from now to maintain that same level of purchasing power.
Remember too that the average American couple currently spends an estimated $245,0004 in retirement on health-related expenses above and beyond their monthly premiums. Factoring in even modest inflation over the next 40 years, the money spent on medical bills alone would far outstrip your savings on the high-earning-always-saving model.
While you could complicate the assumptions above to greater reflect the reality of the average worker (most people don’t make $100,000 right out of college, most people get raises over the course of a career, most people don’t save 10% of their income), the basic math is the same. You simply aren’t going to get to the necessary savings target by age 65 without a little help from risk assets whose returns exceed the insidious and corrosive power of inflation.
As Burton Malkiel said far more succinctly, “It is clear that if we are to cope with even a mild inflation, we must undertake investment strategies that maintain our real purchasing power; otherwise, we are doomed to an ever-decreasing standard of living.”3
While 2/3 of U.S. employees are saving for retirement, according to data from the 2015 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, they are not adequately saving to fund their retirement. In the coming days, we will examine three behavioral impediments to retirement preparation that many plan participants experience and ways to overcome them. This week serves as a great time to remind employees of the importance of saving for retirement and provide them with a realistic picture of how to get to their goals.
For 10 years, Brinker Capital Retirement Plan Services has been working with advisors to offer plan sponsors the solutions to help participants reach their retirement goals. The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.
1 Centers for Disease Control and Prevention. http://www.cdc.gov/nchs/fastats/life-expectancy.htm
2 Live long and prosper, The Economist, June 4, 2016. http://www.economist.com/news/books-and-arts/21699886-how-plan-long-long-life-live-long-and-prosper
3 A Random Walk Down Wall Street, Burton Malkiel.
4 “Health Care Costs for Couples in Retirement Rise to an Estimated $245,000,” Fidelity Investments, October 7, 2015. https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-retirement-rise