Even thoug the stock market is rising and the economy is getting back on its feet, America faces a retirement crisis of epic proportions. Although it certainly isn't news that Americans are doing a lousy job of saving for retirement, a clearer picture of just how woefully unprepared most people are for their “golden years” is starting to emerge, and it doesn't look good.
In fact, it looks downright bleak.
Among U.S. workers, 57% said that they have less than $25,000 in total household savings and investments, excluding the value of their home, according to a report released last Tuesday by the Employee Benefit Research Institute. That proportion is up dramatically from 2009, when 49% of those surveyed reported having less than $25,000 in savings.
Financial advisers play an important role in preparing their clients for retirement. With 10,000 baby boomers retiring each day, now is the time to get tough on middle- and high-income clients who are living in la-la land when it comes to their retirement expectations.
Advisers have to raise the specter of downward mobility and break through the delusions to which many clients still cling.
For example, many think the answer to inadequate savings is to simply “work longer,” or that an active and healthy retirement is a fait accompli.
Fortunately, Americans are starting to take a more realistic look at their retirement future and, therefore, may be more receptive to the advice and guidance that they get from advisers.
The EBRI study also found that 28% of Americans said they are “not at all confident” that they have saved enough for retirement. The figure is the highest level ever recorded during the 23 years of the survey.
Just 13% of those surveyed reported feeling “very confident” about being able to afford a comfortable retirement.
Financial planners and investment advisers are ideally positioned to help their clients navigate retirement.
And now is the time for straight talk. Forget about selling the product du jour; it's time to talk numbers.
Clients need to know that they should have amassed anywhere from eight to 12 times their annual salary by the time they retire.
If reaching that goal means forgoing a vacation, or not buying a second home, so be it.
If a client refuses to boost his or her annual savings rate, it may be appropriate to ask for a signed waiver absolving the adviser of responsibility for failed retirement planning. That would certainly send a message that the client faces a perilous future.
At the very least, it should be made clear that by saving inadequately, clients will be unable to fund a retirement that meets their expectations.
But what about the vast majority of workers who don't use advisers?
Just 23% of workers and 28% of retirees reported that they had obtained investment advice from a professional adviser, according to the EBRI study.
Without a doubt, these workers are the least prepared for retirement. To reach them, the Labor Department should consider launching a series of public service announcements about America's lack of retirement readiness.
Rather than incite panic, however, those announcements should emphasize some basic tenets of retirement planning. Those tenets should include knowing how much is needed to save, saving early, saving consistently and not being overly conservative or aggressive in how those savings are invested.
Financial planning is all about preparing clients for the future, and giving them choices and freedom.
Given the fragility of the Social Security system, the decline of the employer-sponsored retirement plan and workers' savings shortfalls, a retirement crisis is inevitable.
Advisers must sound the alarm and prepare their clients as best they can.