Retirement: The Scary Numbers Behind The Soothing Lies

Tyler Durden's picture

The state of Americans’ retirement accounts is dismal is how ConvergEx's Nick Colas begins his critically important-to-read note on the reality that millions face. According to an early 2012 study by the Employee Benefit Research Institute, Colas notes only 58% of us are currently saving money for retirement – and 60% of those that are have less than $25,000. Thirty percent have less than $1,000. Needless to say, it’s a far cry from the 8x-10x final earnings suggested by most retirement planners. So why are we so far behind? Americans aren’t exactly known for impressive savings habits, but that alone does not explain our poor preparation for retirement. Rather, a general lack of financial literacy, including basic understandings of savings growth and retirement income needs, superseding financial obligations, and basic behavioral finance biases keep us from putting cash away. But if we keep up at this pace, you can expect the ongoing political debate about Social Security to take on new and more strident tones.


Via Nick Colas (and Sarah Miller) of ConvergEx: Hope I Die Before I Get Old


Note From Nick: I don’t remember anything about being 23.  Or 24.  Or…, well, you get the idea.  But understanding the financial decision making of this cohort is a useful exercise, especially when it comes to investing for retirement.  Happily, Sarah is in the thick of these decisions and is, in fact, 23.  It is pretty easy to see the long shadow of an important social problem from her narrative.  If you think the debate over Social Security is raging now, just wait a few years.  And now, over to Sarah…

I’ve been at ConvergEx for just over a year now, and I’m happy to say I’ve survived 12 months at my first job in the “real world” after college. I’d like to think I’m a bit smarter than I was when I walked in here last year. When I was given the employee handbook with all the options for healthcare, restaurant discounts, and pre-tax transportation contributions, I admit I had no idea what to choose. So I did what any 22-year-old Millennial child would have done: I called my parents. I figured my mother, who works in healthcare, and my father, the finance professional, would be the best advisors for these kinds of decisions.

After deciding on my options for healthcare and transportation, we finally came to the 401k – something I had certainly heard of, but never really confronted. At 22, retirement savings was nowhere near the top of my priority list; and having just moved into New York City, I was not keen to tuck away part of my paycheck that could have been redirected towards some other expense. After all, wouldn’t that money serve me so much better as a new pair of boots than it would in some account? Part of me is still inclined to say “YES!”. But knowing my parents probably knew more about this than I did, I followed their advice and put a whopping 1% of my paycheck towards the 401k.

Little did I know that only one year into my employment, at the age of 23, I would be farther ahead in my retirement savings plan than millions of American workers. According to a March 2012 survey by the Employee Benefit Research Institute for “retirement confidence”, the majority of Americans are vastly underprepared for retirement, with very few savings or even none at all. A few key takeaways from the report, which can be found here:

  • Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away, not including home equity or defined benefit plans. Even worse, a full 30% have less than $1,000. A meager 10% have $250,000 or more. (For comparison’s sake, a quick survey of different retirement advisors’ websites showed that the average recommended savings is about 8x-10x final salary – by some estimates, around $1 million)
  • While these low savings might be expected of the youngest age cohort, almost half (48%) of workers ages 45 and up have less than $25,000 saved.
  • Savings rates and the amount saved are strongly positively correlated to education, income, and health status. 93% of those making more than $75,000 are saving, compared to 35% of those with and income of $35,000 or less.
  • Only 38% of all American workers participate in an employer-sponsored retirement savings plan. That said, only 74% are offered this kind of plan. Of those that choose to participate (81%), savings and investments typically total at least $50,000.
  • 34% of workers that had saved said they have had to dip into their savings to pay for everyday expenses. 22% of retirees claim they’re taking more than they thought they would out of their accounts, depleting their savings even faster than they anticipated.
  • Overall it’s a pretty bleak picture. On the whole, Americans are hugely underprepared for retirement, leading quite a few of them (22%) to put off retirement to a later date, or not retire at all (7%).

But why the lack of preparation? Several complementary reasons might reveal the answer:

1. Lack of financial literacy. Americans on the whole are not versed in the ways of financial planning. A study by Lusardi and Mitchell in 2005 found that less than half of a sample of US adults 50 and older was able to answer simple questions about inflation and compounding interest. Another study, by McKensie and Liersch in 2011, showed that a majority of adults misunderstood savings growth: they expected it grew linearly rather than exponentially, therefore underestimating the potential return a small investment could have over several years. When exponential growth of savings was demonstrated, real employees chose to save more for retirement (see the study here). To top it all off, 34% of those surveyed by the EBRI estimated they needed less than $250,000 to retire.


It’s plain correlation, here – the more you know about retirement planning, the more likely you are to do it. Most Americans don’t even calculate how much they might need, leading them to grossly underestimate the costs. A good portion of them (79%, according to the EBRI) also think that Social Security will be a dependable source of income during retirement – much more so than retirees in the 20th century. While that may be true for the Baby Boomers, my generation can’t bank on SS being there when we turn 65. Instead, it’s important that we understand the importance of saving for retirement – or, more likely, the risks of not doing so.


2. Basic behavioral finance biases. Much like the typical stock market investor, retirement savers face several obstructions in the way of their savings goals. A short report from the 2010 Social Security Bulletin, found here, highlights a few of these.

“Ambiguity aversion” is rampant: investors don’t trust products they don’t understand. Given the lack of financial understanding of retirement accounts, then, it’s not surprising that so many Americans shy away from them.

“Heuristics bias” is another classic behavioral finance term found in retirement savings literature. Even if we do choose to save, we may not follow the so-called “rules of thumb” that classical economics assumes in retirement accounts. For example, the traditional allocation shift from equity to bonds as one ages is assumed in classical finance, but according to a 2009 study by VanDerhei, quite a few older investors did not follow this “rule” and lost a significant portion of their savings in 2008.

“Hyperbolic discounting” is also to blame. This is the theory that we sacrifice long-term large gains for short-term immediate gains – we’d rather have an extra $20 in our pockets every month than in an account we don’t touch. This will be a tough one for Americans – the chronic spenders – to overcome.


3. Superseding financial obligations or situation. From weekly groceries to college tuition, savers today are putting other financial obligations ahead of their retirement plans. According to the EBRI survey, 62% of workers consider their current level of debt to be a problem, and may choose to allocate more spending to paying down that debt than to saving for the future. Lower income households are especially prone to this problem: with less income to put away, fewer and fewer of them are saving (down to 35% in 2012 from 49% in 2009).


4. Options. While employer-sponsored retirement savings plans yield high participation rates and above-average savings, not all workers are fortunate enough to have this option. Defined contribution plans such as 401ks and IRAs have overtaken defined benefit plans in the private sector: according to a Department of Labor report from March (found here), a peak of 175,143 private pension plans existed in 1983. That number is now down to 47,137. And as various retirement account studies show, “opt-in” retirement accounts do not draw as many participants as “opt-out” – a clear explanation for Americans’ under-preparedness. This has prompted a few researchers to suggest more active advertisement of plan options for those both with and without employer-sponsored plans to facilitate higher response rates from employees.

The public sector, meanwhile, is still in relatively good shape in terms of defined benefit plans. But while state and local public employees near retirement might expect a decent payout when they become retirees, plans may have to change for public sector employees in the future. Many states – California and Illinois  in particular come to mind – have started to consider changes to pension plans given massive cash shortfalls and, arguably, overestimation of growth potential in the pensions (to see a list of expected growth rates in public pension plans by state, see here). Some localities, such as San Diego, have already switched city workers over to defined contribution plans instead.

With these obstacles in place, it’s not necessarily shocking that Americans are financially underprepared for retirement. More financial planning education, or at least a simple demonstration of the importance of saving, and clear options to all workers may help to better prepare us. But a close look at what we expect from our retirement plans – both in the public sector and the private – is essential, given a general misunderstanding of savings growth and payouts on both ends. It’s up to individuals in the private sector to make our own changes, but public sector pensions face quite a host of litigation and regulation to push through.

Most of all, it’s concerning that so many Americans seem to think Social Security is a dependable enough program to fund their retirement. The average payout for a retired worker in August was $1,235.63 – hardly enough to sustain oneself through several years of retirement. My generation will need to come to terms with the fact that by the time we retire, SS may simply not be around. But those who are approaching retirement in the near future need to understand – and plan on the fact – that Social Security cannot be their only source of income in their retirement years. They need to start saving, and fast.

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Kitler's picture

Social Security cannot be their only source of income in their retirement years. They need to start saving, and fast.

Good idea since Wall Street needs more muppets or it will soon implode.

PMs and farmland people.

AldousHuxley's picture

despite sixfigure student loans, young Americans are good for one more scam....

boomers will be able to offload their old house for multiples to finance their retirement.

Thomas's picture

"8x-10x final earnings suggested by most retirement planners."

That won't get near security. Such estimates assume huge returns on those savings during retirements. I say 20x earnings. Some say 25x final earnings.

icanhasbailout's picture

people will simply work until they die

Precious's picture

Whoever invented the word "entitlement" should be ...

Thomas's picture

Do you think employers will keep old folks with oxygen tanks and feeble brains on payroll?

The Alarmist's picture

Nope, and that's why so many of them supported the ACA , AKA ObamaCare.  Keep the healthy ones healthy to keep them on the job, and have the Death Panels deal with the rest in the name of Qualies and efficiency.

LetThemEatRand's picture

Do you consider it a "death panel" when the insurance company tells a 65 year old who did everything right and made sure she had insurance that her life-time maximum of $1M is met and she needs to stop the treatment that could keep her alive and reasonably self-sufficient for another decade? 

Anusocracy's picture

Get the f_cking government out of healthcare so the costs can come down. The government effect drives up the cost everything.

Everything government touches turns to crap. Ringo Starr

Almost Solvent's picture

You mean end the rules that require hospitals to treat anyone who shows up regardless of insurance or ability to pay?

Because if you REALLY want to cut healthcare costs, you are going to have to start denying medical services to a huge number of people who are unable to pay for their care. 


JamesBond's picture

yes, that rule.  get rid of it.  go to a charitable hospital and accept the care you get there.

oh, you mean you won't get free hip replacement surgery?   Ah....  no.


northerngirl's picture

Well, how about this...Hospitals stop charging $25.00 a table for Tylenol, or $30.00 for an ice pack?  There are many ways to bring the cost of health care down in this country without denying medical services to those who cannot pay.  Denying medical services is such a desperate cry for those that do not want to spend the time seeking true cost cutting measures.  What we need is for people to stop looking at the government for the solution and answer the questions for ourselves.

James_Cole's picture

"Get the f_cking government out of healthcare so the costs can come down. The government effect drives up the cost everything."

This idiot argument goes on ad nausea. Of the OECD countries the US spends the most (by a wide margin) on healthcare and famously has some of the worst results. Spending far more per capita than every publicly funded healthcare system in a variety of countries.

The Alarmist's picture

They don't tell her to stop treatment ... they tell her to find other ways to pay for it.  Like selling the house she thought she could hold on to and pass to her kids.  By the way, the current ACA will do the same things, as does Medicare.  The difference is that with ACA as the law of the land, suitable alternative financing sources are drying up.

10mm's picture

Those folks will take a walk in the woods or assisted by death panel.

Boston's picture

As they should. Who decided that "retirement" is some sort of god given right?

Bicycle Repairman's picture

Boston, I hope you come out into the light of day and express that opinion.  Don't expect any politician to do it for you.

LoneStarHog's picture

For one thing, when people retire it creates job openings for the next generation.  Capiche'?

Nick Jihad's picture

Now this is an economic myth that needs to die - the naive idea that there is a fixed pool of jobs, so that a spot only opens up when an old person retires. Sounds kinda dumb when you spell it out like that, doesn't it?

JuliaS's picture

I like the Eastern European retirement plan. Everyone's covered, no one's rejected, required contributions - zero.

It's called "suicide". Live for as long as you can and then don't. If you really care about your kids' future, take a banker or 2 along with you when you decide to end your life. Don't let your own departure go to waste. Do something good for the society.

Bunga Bunga's picture

All retirees will be on drone watch soon.

venturen's picture

25x final earning mean you saved all your money from your working life. The government takes 40% of your income so for 25x you have to work 62.5 and not spend one dime....REALLY?

hapless's picture

Yes, really.  Just becuase things are ugly doesn't change the way things are.  Such is the cost of forcing savings income to near zero in a fruitless attempt to kick start the economy.

In essence, your gov't is telling you to forget saving for retirement, spend what you have now and hope that either things get better or that the end is quick and painless.

Seer's picture

"boomers will be able to offload their old house for multiples to finance their retirement."

I spotted this flaw a LONG time ago.  Many still believe in this fantasy.  I suppose it falls under the category of "when all you have is a hammer..."

The ONLY caveat that I can think of, however, is if one's home is situated on a farm/farmland.  Well, OK, that's My Hammer... and I'll be looking to transition from "farm boss" to "mentor"...

kaiserhoff's picture

What is saving, with sharply negative interest rates and the kleptocrats in charge?  Howsabout investing..., as in ratcheer?



Cursive's picture


No kidding. BernanQE has made fools of savers. I'm a saver and I've truly been a sucker. Thanks, BernanQE, you sacrificed prudent savers to save the likes of legendary asshat Jim Cramer.

Just Observing's picture

I'm a saver too.....but about 15 years ago, I saw the handwritting on the wall, and quit saving in dollar denominated paper.  It was pretty easy to see they intended to run the national debt off the scale, and then devalue the dollar to attempt to keep up with it.

From that point on, I bought gold and silver ( 250 and 5 bucks/oz ) hand over fist, put the rest in a self sufficient homestead so we would go into retirement with no debt, almost no utility bills ( spring water, septic system, solar power, even my wireless internet is free ).

Wife and I are early 60's, retired and living our dream.  It can be done, but NOT if you listen to conventional "wisdom".



fonzannoon's picture

If that is true, and i am not doubting you...and you saw the writing on the wall 15 years are my freakin hero.

dhengineer's picture

Yeah, it can be done.  We cashed in our IRA's three years ago, paid the penalties and taxes, and bought a little fixer-upper farmhouse in upstate New York.  We qualified for the homebuyer tax give-away, so the final bite wasn't too bad.  We fixed the place up, and then we sold our NYC coop... We can actually live on the SS payouts that we will qualify for in two or three years (assuming that SS is still there).  We bought gold and silver beginning in 2005, and it has doubled in value so far.  We are becoming self sufficient, learning to can the food from the garden, and raising chickens.  Our own well, septic, neighbors who raise Black Angus, and low taxes on our rural land make things pretty easy.

stocktivity's picture

"Rather, Colas cites a general lack of financial literacy, including basic understandings of savings growth"

What savings growth! Bernanke took that away from savers. This guy's from another planet. It's all Bullshit!

A Nanny Moose's picture

Why is Wall St. the only mechanism for savings? Who forces....sorry...engineers the placement of savings in to accounts which can only be invested in Wall St. instruments? Who gives Wall St. a stock market monopoly? Who destroys the currency, making Bank of A. Sealy a bad choice?

nofluer's picture

What I don't see mentioned in the "reasons" that some aren't "savng" for "retirement" is an awareness of the careening mine ore car that has been heading for the bottom of the pit for several years. The descent has been accelerating lately - which has alerted the more clueless of our populatoin that it's coming, and they are just starting to try to figure out a way to get the snot OUT of the way of the car. I saw it many years ago, and at that point we stopped "contributing" to the delinquency of the government, bankers and insurance companies by keeping and spending our current incomes instead of meekly turning it over to them.

Which is not to say we haven't been doing our own version of "saving" for "retirement." My advice then was the same as it is now... put your "savings" into something that will return you a CURRENT SOURCE of income. The classic example of this would be buying and operating a liquor store. Another example would be to buy a farm... and learn how to grow food... and hopefully get the farm PAID for before the crapo hits the fan. This strategy works whether we get hyperinflation, deflation, or no change.

Given the fiat nature of our economy, I expected hyper-inflation. Given the history of such things I also figured that gold will be confiscated at some point, and so is a bad investment. In only one extreme case is farmland confiscated - and that's the shift to full-on socialism, (as opposed to fascism, where "ownership" is not assumed by the State), under which scenario there is no investment that will survive - even gold fails. And there are enterprises that can be pursued sub-rosa, and would therefore be immune by their nature from confiscation.

That the monetary wonks don't count those who followed my advice above don't consider them to have "saved" for "retirement" is perfectly understandable (and amusing) since they can see no world without dollar signs in it - which is to say they are "dollar" (price) oriented - not value oriented. Those who tout the purchase of gold to the exclusion of all else are somewhat value oriented. But they are also possibly of somewhat limited imaginations, since there are things that, in extremis, there will be many commodities that will have more value than a cold metal that can't be eaten and won't keep you warm or keep the rain off of your head. And there are many strategies to create such commodities that do not involve buying them.

lolmao500's picture

I'm 25 and I got 25k in silver... but again, I'm reading ZH, so I'm in the top 1%...

And anyway, the world will be hit by several crises in the next 10-25 years that will probably change fundamentally the world we live in. So saving money for retirement in this changing environment is quite a waste of money and time.

SemperFord's picture

I agree, which is why I do save but spend my money since I could die at any time. Some guys have gotten smart in their old age and started robbing banks for ONE dollarjust to be housed by Uncle Sam in the Federal Pen with 3 hots and a cot.

Ham-bone's picture

That's the whole point to break the game - get out of debt fast, live within your means, avoid credit like the plague...put excess in PM's but enjoy the rest.  Stop saying I'll be happy then or saving so you can be a 65yr old busy golfing.  If you can, work less and enjoy life more...doesn't mean spend money you don't have but simplify and get happy if you can.  Do more with less.  Stop chasing some commercial fantasy that equates who you are with your income and possessions.  All this bullshit bout put away 10% of income, acheive 8% returns 4ever, what a bunch of shit.  Live in the moment without borrowing from your future and maintain self reliability.

Offthebeach's picture

It's not bank robbing. It's 'retale quantitive easing '.

northerngirl's picture

Your parents should be proud of you!  Keep up the good work.  For those that will vote you down, they are just jealous because you are in the process of being self sufficient.  Something that many Americans hate.

AG BCN's picture

The illusion that there will be safety net breeds complacency. 

If you have never experienced a currency / finanical crisis then you will not prepare.  

Thomas's picture

And you got a couple of "junks" for that post? What the hell are ZHers smoking?

AG BCN's picture

they think they are prepared already. 

Thomas's picture

And now I get junked. Well, if you could hear me right now, you would hear a rapid series of armpit farts.

AG BCN's picture

armpit farts are a source of humour that is deeply undervalued. 

Thomas's picture

Spent all of middle school perfecting them. I was skinny then so required careful cupping. Now I get flappy sounds without even trying.

Lloyd_Xmas's picture

I can fart with my hands. Plan to supplement my retirement with that talent.

GeezerGeek's picture

Perhaps ZH has been invaded by a bunch of tweeting twits using their Obamaphones to coordinate an attack on your common-sense observations.

toady's picture

There is a lot of that going around. Someone just goes through junking everything, but never saying why

Don't think about it too much ... trying to figure out the kind of person who goes through hitting every second down arrow, well, it's not worth the effort.

MilleniumJane's picture

Problem is, people have paid into the system.  People will not be receiving what they were promised.  Fraud at genius levels.  People got screwed.  That is what's wrong.  No, I didn't junk you.