An analysis by national correspondent Ryan Cooper for TheWeek.com declared the 401(k) system to be “a blight on the face of the American republic.” That’s the kind of over-the-top headline that is click-bait these days, but when you look at the numbers, the only conclusion one can reach is that a disaster is looming — even if we blame operator error rather than the system itself.
“The median balance among all families is a piddling $5,000, but even among families whose head of household is 56 to 61 years old, the figure is a mere $17,000,” Cooper wrote, using statistics ultimately derived from the Federal Reserve Bank’s Survey of Consumer Finance. “Millions of people are about to reach retirement age with maybe half a year’s income saved up, and millions more have nothing whatsoever.”
Now, the median balance for households that actually have retirement savings is about $60,000 — but that’s little comfort when you realize that nearly half of households have no retirement savings at all.
There are a lot of factors that keep people from saving enough for retirement, not the least of which is the fact that half of all households in this country get by on $50,000 a year or less — sometimes much less. And for the lower income tiers, real wages have been stagnant while things like housing, education and health care have not been. Not by a long shot. What’s more, the number of households with retirement savings is actually lower since the Great Recession than before.
Even households that are earning more don’t seem to be serious about retirement savings. Only one in 10 households headed by a person between 55 and 65 has at least four years of income set aside; the nonprofit National Institute on Retirement Security recommends a savings target of five times income by age 53 and 7.4 times income by age 65. (I’ll wait while you do the math and have a good cry.)
In his analysis, Cooper refers to the “paradox of thrift,” which is a fairly well-understood phenomenon: The kind of savings and thriftiness that are good for the individual are not good for an overall economy that depends on consumer spending. Looking at retirement savings suggests to me that there might also be a paradox of optimism: Americans seem so sure that their future prospects will cure their past failures that they don’t take the steps necessary to secure that bright future — even as the time to correct course grows shorter by the day.
Financial optimism isn’t limited to retirement planning. I have three women friends who are in the process of ending marriages of three decades and more, and I can’t help worrying about their financial well-being as much as their psychological state. “Gray divorce” — divorce over age 50 — is twice as common as it was 25 years ago, according to researchers at the National Center for Family & Marriage Research at Bowling Green State University in Ohio, and older divorce “is associated with fewer financial resources compared with divorce that occurred at younger ages, at least among women.”
All three have developed lifestyle habits that assumed that the future would be at least as financially secure as the past, which may not have been irrational but was certainly optimistic. One of my friends may be able to stay in the house she loves; the other two will have to move to dramatically cheaper quarters because they still have large mortgages at an age when being mortgage-free ought to be in sight. I attribute this to more optimism, since both incurred significant new debt by buying houses with their husbands literally months before the marriages collapsed.
It feels strange to argue against optimism, but here’s another paradox: Nothing makes the future feel sunnier than having a rainy-day plan.
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Yes, I understand the math on paying off a mortgage versus investing the money instead, but the point is that most Americans do neither.
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Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com. |