Americans had better start acting like London commuters and “mind the gap” when it comes to retirement, or they could be in big trouble down the line.
In the London Underground, a recorded message reminds passengers to be mindful of the space between the platform and the train. On this side of the pond, the so-called "retirement gap" occurs when the money one needs in retirement winds up being less than the amount one has saved.
In either case, the gap between where one currently stands and where one aspires to sit comfortably is fraught with danger. And in the case of retirement, it’s often up to financial advisors to provide both fair warning and guardrails to clients to protect them from peril.
“We have 25% of working Americans that don't have access to a workplace savings program,” said David Musto, CEO of retirement record keeper Ascensus. “That's 57 million Americans that today aren't consistently saving at the workplace for a better retirement and financial future. So we have work to do to ensure that we get more people into the savings system and encourage more of those individuals to save more over time.”
The first thing that has to happen to narrow that gap is the creation of more small workplace plans, Musto says. In fact, that's currently happening, as Washington makes retirement a priority while innovation across the states is encouraging the formation of more of those programs.
The second thing necessary to alleviate the problem in Musto’s view would be to ramp up the automation and personalization of the investment experience. The third would be increased personalization and democratization of financial advice.
“We know that the primary reason people don't save enough is that they're facing other financial priorities in their lives, and we need to help them see through those priorities in order to achieve their end goals,” he said.
One reason why the retirement gap keeps getting attention is because the gap itself keeps widening.
According to Northwestern Mutual’s 2024 Planning & Progress Study, Americans believe they will need $1.46 million to retire comfortably. That’s a 15% increase over the $1.27 million reported last year, far outpacing today’s inflation rate, which currently hovers between 2 percent and 3 percent.
Over a five-year span, people’s "magic number" has jumped a whopping 53 percent from the $951,000 target that Americans reported in 2020, the study showed. Meanwhile, the average amount that US adults have saved for retirement dropped slightly, from $89,300 in 2023 to $88,400 today, according to the study, and is more than $10,000 off its five-year peak of $98,800 in 2021.
That’s a serious savings gap right there, with a so-called “Silver Tsunami” of retirees set to hit the system. More than four million Americans will turn 65 in 2024, an average of 11,000 Americans per day, and that wave will continue through 2027, the report says. And a lot of those Americans don’t see their own personal retirement gaps closing in time to save them from outliving their money.
The 2024 Planning & Progress Study found that among the generations closest to retirement, just half of boomers (49 percent) and Gen Xers (48 percent) believe they will be financially prepared when the time comes. Furthermore, Gen X sees a 42 percent chance they could outlive their savings on average, while boomers put the probability at 37 percent, the study shows.
Danielle Darling, an LPL financial advisor at Resource One Advisors, admits that the retirement savings gap is wide. In her view, some older people haven't focused yet on retirement planning, while many younger people are hyper-focused on retirement planning because they want to be better off than their parents. She believes this is especially true of millennials, who weathered the Great Recession as they were launching their careers.
“Some of my wealthiest clients started out the poorest and got to where they are today because they prioritized their future selves first instead of their present selves,” Darling said. “Regularly reviewing your finances with a financial professional can help increase the chances of meeting retirement goals. We often see that making a small tweak, such as updating investment allocations within retirement accounts, could make a substantial difference in the long term.”
Jerry Davidse, CEO of Presilium Private Wealth, is a firm believer that the retirement savings gap can be solved through better financial education. Two key parts of this education are understanding the power of the compound effect and, second, properly defining risk.
“From a compounding perspective, an investment of $250 per month into the S&P 500 for the past 40 years is now worth about $1.46 million,” Davidse said. “Yet many Americans still don’t feel comfortable allowing their savings to compound in stock-based investments.”
This is often due to improperly defining risk, he said.
“Too often people categorize the market as too risky when in reality, not investing in the market through a properly diversified portfolio is the true risk as it is the only real way to maintain your purchasing power over any meaningful period of time, like a 30-plus-year retirement,” Davidse said.
The retirement savings gap has always been a concern, says Christine Wang, lead advisor at Nilsone Partners. However, it has become a far more significant issue during the last three years in her view as a result of inflation, longer life expectancies, and inadequate savings.
“Although annual inflation has stabilized since the highs of 2022, we still have not seen annual inflation above 3 percent since the 90s,” she said. “With higher inflation and longer life expectancies, the gap continues to grow faster than it has previously.”
Wang says she addresses the retirement gap at her practice by “guiding our clients through personalized advice, proactive planning, and ongoing monitoring and review of their financial plan.”
Katy Song, chief financial planner at Domain Money, says the magic number for her clients tends to creep up mainly as a result of their lifestyle, and the fact that they are getting a year closer to retirement with each annual check-in.
“Approximately 50% of my clients can achieve their annual savings goal through contributions to qualified plans (401(k), 403(b), SEP IRAs, profit sharing and matching, as well as traditional and Roth IRAs),” Song said in an email. “The rest need to supplement their retirement savings with additional savings into their taxable brokerage account or by mentally earmarking RSUs or equity compensation as part of this goal.”
The good news, she says, is that the majority of the 50 percent who need to save more than allowed into qualified accounts can actually afford to do so. For those who can't, she gets creative about looking at how they can still make retirement happen. For example, she advises that some clients sell their home and move somewhere more affordable.
“The key to finding greater financial security for retirement is to know your magic number, and in turn, what you need to save each year, and how aggressive you need to be with that savings,” Song said.
Finally, Jacob DuBose, wealth manager at Savvy Advisors, views the retirement savings gap as a function of data scientists looking at where working folks are now with spending, adjusting those costs for inflation and comparing what income sources – like savings, pensions, Social Security, etc. – those people have to support that spending when retired. And the figures point to a replacement shortage for decades to come.
“The current ratcheting up of inflation has only drawn more attention to the same problem,” DuBose said. “However, not all situations are the same. There are a lot of sophisticated tools available to help plan for one’s future. But it starts with taking responsibility for understanding how your unique situation will unfold if you make no changes, understanding what changes are within your control, and making those changes as soon as possible.”
On the bright side, he said most of his clients are surprised by how well their trajectory analysis goes.
“It’s a reality that how one’s retirement will actually play out is unpredictable and will likely require some measure of flexibility. The quicker one gets started in auditing their situation, the better. They might even be pleasantly surprised,” DuBose said.
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