Nearly a third of Americans aged 55 and over have no retirement savings. This is very concerning given the fact that Americans are living longer. According to the CDC, life expectancy at birth in 1921 was 60.8 years. That has risen an average of 1 year for every 6 years to a current life expectancy of 77.8 years in 2021. This means Social Security is under more strain and folks who do not have personal savings and retirement savings are doomed to make a choice, keep working or live only on Social Security.
Since Congress lacks the consensus and the political willpower to address Social Security shortfalls, employers have embraced automatic enrollment retirement plans more and more. The adoption of such plans has increased from 50% of employers with this feature to 68% of employers with this feature over the past 10 years. The downside is that auto-enrollment plans often have lower contributions from employers as the default amount is often set at 3% of gross wages. Retirement plan behemoths such as Fidelity, American Funds, and Vanguard report that according to recent surveys, employees that state they are happy in retirement contributed 10% or more of their annual wage to retirement plans while 87% of respondents that stated they are not satisfied with their retirement balances contributed less than 10% to their retirement plan.
Another disconcerting statistic is that according to the Social Security Administration, 49% of women and 45% of men begin taking their Social Security retirement benefits before they reach the age when they qualify for full benefits (around age 65).
According to a recent study by T. Rowe Price, employees often set their contribution rate to take full advantage of their employer’s match (which averages 3.2% across all plans) but no more than the amount to maximize the match. If an employer matches 3.2% of wages and the employee contributes 3.2% of wages the total annual contribution to the plan is 6.4%, far below the 10% threshold cited to be happy in retirement. In fact, that is 56% below the necessary amount to be happy, according to the study mentioned above.
What is Congress doing about this? Congress is debating legislation (known as SECURE Act 2.0) that would require any employer with at least 10 employees who sponsors a 401(k) plan to automatically enroll eligible employees at a 3% contribution rate. Employees would retain the right to opt out of the plan (source: SECURE Act 2.0).
What should you do about it? You should ensure that the combination of your contribution and your employer’s match is equal or greater than, 10% of your annual income. If married, you and your spouse should consider both person’s annual wage and annual contribution amounts.
One last word of advice. If you change employers, weigh the option of rolling your retirement plan from your former employer to your current employer’s plan or your own personal rollover IRA. There are fees and investment selections that should be evaluated carefully. If you do not feel comfortable conducting your own evaluation, you should seek the help of a professional investment advisor.
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