Can you retire?

Compounding financial crises have more people reconsidering what was once a given

The last 20 years have brought three major financial crises, each more devastating than the last. The Sept. 11, 2001, terrorist attacks on the World Trade Center in New York and Pentagon outside Washington, D.C., brought a temporary shock, with the markets—already slumping from burst of the dot-com bubble—losing about 10% of their value in the days immediately following. While the attacks left a mark on our collective psyche, the economy recovered fairly quickly, with 2.7% GDP growth in the fourth quarter of 2001. Just a few years later came the Great Recession.  It officially began in late 2007 and really hit home in September 2008 when Lehman Brothers—at the time the fourth-largest investment bank in the US—declared bankruptcy. Before things began to turn around in mid-2009, the unemployment rate had doubled and Americans lost nearly $20 trillion in net worth. We don’t know the full economic impact of the COVID-19 pandemic and may not for some years, but more than 50 million Americans have already filed for unemployment at some point since March. By most measures, it’s the worst financial crisis since the Great Depression. The cumulative effect of these crises has left many workers wondering whether they can even afford to retire.

Generation Gap

Depending on your age, the current financial crisis and the ones before will affect you differently. But across the board, a TD Ameritrade study released in June found, 70% of us will have retirement plans altered by COVID-19. Almost a third already have or are considering taking money out of IRAs and 401(k) plans to weather the storm, and about half of those surveyed think they’ll look for work after “retiring.”

Many Baby Boomers set to retire this year or in the next few years are pushing that off. Among Generation X, the generation scheduled for retirement after the Boomers, almost 40% are considering delaying it, TD Ameritrade found. These financial crises occurred during their prime earning years, and nearly half don’t have retirement accounts. Millennials, who came of age and entered the workforce during this tumultuous period, are slated to become the first generation in American history to be worse off financially than their parents, despite having more education than previous generations. They’ve delayed marriage and families and can’t afford to buy homes, a major factor in wealth creation. They’re likely to live longer, meaning they’ll need more money for a comfortable retirement.

Chipped Away

The aforementioned financial crises aren’t the only cause for retirement concern. More incremental changes to the mechanics of retirement are also at play. In days gone by, most workers stuck with one company for most or all of their careers and upon retirement were rewarded with a generous pension that paid them a portion of their salaries. Since the introduction of the 401(k) as we know it in 1980, the pension has steadily declined. In a pension plan, the employer assumes the investment risk. In 401(k)s, the risk is on the employee. In the private sector, 35% of employees still had pension plans in the early 1990s. That number is now around 15%. That timeline coincides with the increase of the retirement age after nearly a century of decline. With the onus on employees, financial crises affect workers’ retirement prospects negatively as they spend years recovering wealth lost in the last downturn.

In their annual report, the Social Security and Medicare Boards of Trustees said the Social Security trust funds are on pace to be depleted by 2035, meaning after that Social Security will only be able to pay out what it takes in a given year, amounting to 79% of the scheduled benefits for retirees and disabled workers. That’s because a large generation of Baby Boomers is retiring while smaller generations with lower birth rates are the ones paying in. And that was without factoring in how many people are not paying in while unemployed during the coronavirus pandemic. Medicare’s Hospital Insurance fund is slated to exhaust its reserves in six years. There will either be cuts to Medicare and Social Security or increased taxes to fund them.

Hill to Climb

A US Government Accountability Office report released last year showed that 48% of households headed by someone 55 or older had no retirement savings. It was an improvement over 2013, when that figure was 52%, but still a cause for concern. Gen Xers have a median retirement savings around $70,000, so there’s some work to do. Millennials at least still have a lot of time between now and retirement, but they’ll need to manage expectations. Pre-pandemic, 43% of Millennials expected to retire before age 65, according to a T. Rowe Price survey, but NerdWallet concluded that based on student debt, high rents, and distrust of the stock market, their mid-70s was more realistic.

Currently, the average retirement age in the US is 62, which is also the age at which Social Security benefits kick in. “Full retirement age” is 66, when people can collect 100% of their monthly benefits. If you wait until 70, you get 132% of the monthly benefit. Plus, staying in the workforce longer gives you more opportunity for savings and fewer years of retirement to budget for.

Expanding retirement plan coverage, instituting mandatory minimum contributions by employers and employees, and a new social safety net, as proposed by the Stanford Center on Longevity would help, but without government or employer intervention workers will have to adjust their outlooks. Yes, you likely can retire, but you’ll have to wait longer to do it. And hope the financial crises are kept to a minimum.