The U.S. economy has created a divide among consumers, separating them into groups of haves and have nots – retirees included. Cerulli Associates, a research and consulting firm, estimates that an $84 trillion wealth transfer will take place from older to younger generations by 2045. However, there are concerns about a retirement savings crisis brewing for those who have not saved enough for their elder years. This dynamic is playing out in the economy, according to Chayce Horton, a senior analyst at Cerulli. He mentioned that the wealth transfer will not be widespread and that a significant amount of wealth has been concentrated in fewer and older hands than ever before.
The cost of retirement has been on the rise due to inflation, making health and long-term care in old age more expensive. Fidelity estimated that a 65-year-old single individual may need around $157,700 to cover healthcare costs in retirement, while a retired couple of the same age may need about $315,000. This increase in costs, combined with low retirement balances, has fueled concerns about a retirement savings crisis. A recent survey by the National Institute on Retirement Security found that 79% of Americans believe there is a retirement crisis, up from 67% in 2020. More than half of respondents expressed concern about not having financial security in retirement.
The average overall 401(k) balance was reported to be $125,900 in the first quarter, according to Fidelity Investments. This includes both employee and employer contributions, resulting in a record total savings rate of 14.2%. However, these numbers do not account for the nearly half of Americans who lack access to workplace retirement savings plans. To address this issue, Teresa Ghilarducci, a professor of economics at The New School for Social Research, suggested implementing mandatory savings plans that require participation from all individuals. She emphasized the power of compound interest and the significance of starting early in a pension plan to ensure sufficient savings in retirement.
Ed Murphy, president and CEO of financial services provider Empower, supported the idea of a forced savings approach. He explained that for individuals earning $35,000 to $50,000 without access to a workplace retirement savings plan, the likelihood of saving anything is minimal. However, once they have access to such a plan through payroll deduction, up to 90% of them will save. Murphy stressed the importance of increasing workplace savings participation to encourage more people to save for retirement and secure their financial future.
The retirement savings crisis in the U.S. is a pressing issue that requires attention and action. As the cost of retirement continues to rise and the divide between savers and non-savers widens, it is essential to implement strategies that promote savings and financial security for all individuals. Mandatory savings plans and increased workplace savings participation can play a crucial role in addressing this crisis and ensuring a more stable retirement outlook for Americans across all age groups.
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