Americans have long faced financial difficulties in getting ready for retirement, with pressure coming on multiple fronts. Employers have reduced the availability of pension plans, leaving it to workers to save enough through 401(k) plans, IRAs, and other retirement accounts. Yet even with these threats, most Americans haven't taken the steps necessary to cover the shortfall, and as a result, the nation faces a huge retirement shortfall that could jeopardize your financial security after you retire.
The multitrillion-dollar retirement problem
The biggest financial challenge workers face is how to make sure they save enough during their careers to cover their expected expenses in retirement. Many Americans haven't been doing a good job in this regard, according to the latest figures from the Employee Benefit Research Institute [opens PDF]. In the aggregate, American households led by those between the ages of 25 and 64 face a total retirement shortfall of $4.13 trillion. That works out to $25,326 for each and every one of the more than 163 million Americans between the ages of 25 and 64, according to the most recent Census data.
Family status plays a huge role in determining how much your projected shortfall could be. As you'd expect, married couples who can combine their financial resources are in the best shape, with shortfalls ranging from $19,304 per person for those in the early Baby Boom cohort to $21,379 per person for those in Generation X. Single females are at the greatest risk, with long lifespans and lower incomes combining to put them at the biggest risk.
Moreover, the overall numbers tend to downplay the true impact on those families that face the biggest financial challenges in retirement. The EBRI warns that the figures above are somewhat depressed by the fact that they include individuals who aren't seen as being at risk. When you focus in on those who are expected to have shortfalls, the average figures rise considerably.
As you can see above, six-figure shortfalls are much more common when you look solely at those households in a deficit situation. Especially for those at the older end of the age range, it's difficult for workers to make up for these shortfalls during the last few years of their careers without taking dramatic action, such as working longer or drastically raising the amount they save.
How to close the retirement gap
In looking at the retirement shortfall problem, the obvious question is how to deal with it. The EBRI identified one clear indicator of retirement success: participation in a 401(k) plan.
Specifically, the EBRI broke out where Generation X households stand by how many years of eligibility in a 401(k) plan they have left before retirement. You can see the results below:
The longer you have to contribute to a 401(k), the lower your shortfall is likely to be. Moreover, longer 401(k) participation actually reduces the number of Generation X households at risk of a shortfall. Among those with no more years left, more than 60% are at risk. Yet that number falls to 38.8% for those with one to nine years of eligibility, 26.3% for those with 10-19 years, and just 14.1% for those with 20 or more years left.
The other key factor the EBRI identified is taking care of long-term healthcare costs, including nursing homes and home healthcare. For most individuals, if you can eliminate those costs, it leads to huge reductions in projected shortfalls, with average figures dropping by as much as 90%. Obviously, simply ignoring those costs isn't realistic, but looking at measures like long-term care insurance to help you avoid the worst-case scenarios for those expenses can make a big difference -- even if it involves adding premium costs to your retirement expenses.
The best solution to the retirement crisis is to anticipate its effects and take early action. The sooner you can raise your savings rate and address the potential catastrophic costs of healthcare expenses, the easier it will be to reach your financial goals for a secure retirement.