It is clear that our country's savings culture — and the systems that support it — need a significant reboot.
While 88 million active and retired Americans have access to a retirement savings program through their employer, tens of millions of working Americans do not. And even those who have access to a plan often save too little or start saving too late.
The discouraging result? According to the Center for Retirement Research at Boston College, 53% of U.S. households are at risk of being unable to maintain their pre-retirement standard of living after they stop receiving paychecks.
Certainly there are challenges, cultural and mathematical, to getting Americans to put away more toward the day they stop working. Even those who recognize the importance of saving must find a way to fit it into an often tight household budget. Some have undoubtedly looked at what the retirement calculators indicate they should be setting aside, weighed that figure against their discretionary income and simply given up on the whole idea. Others, who could save more, find themselves battling a culture of consumerism that stresses spending today over saving for tomorrow.
Americans must do more — that they must take responsibility for funding their own retirement because their current savings pace will prove insufficient, in many cases, to support them through a retirement that could last more than 30 years.
They need help, not only from government policymakers who must ensure that retirement savings plans remain attractive for employers and employees alike but also from the financial services industry, which must continue to innovate so that it can deliver the products and services Americans need to make retirement planning understandable and retirement saving attainable.
A good example on the latter front can be seen in the vast progress the industry has made in reshaping the retirement income marketplace.
Take, for example, annuities. Today's offerings are innovative, hard-working retirement savings and investment strategies that are more flexible and user-friendly than they were even a decade ago. While they deliver the same valuable tax advantages they have always delivered, more recent innovations offer income protection against market downturns, the potential to share in market upturns, access to a broad range of investment options and optional death benefits for the policyholder's heirs. Because individuals need a way to convert their savings into income after they stop working, today's annuities also offer a guaranteed lifetime income that can help ensure they will never outlive their nest eggs.
There are costs associated with these protections, of course, just as there are costs for other types of insurance. Those saving for retirement must assess — through a trusted financial professional — whether those costs are worth the benefits. But, at a time when individuals are increasingly responsible for their own long-term financial security, many are beginning to understand the value peace of mind in retirement can bring.
There is, to be sure, more that we in the financial services industry can and must do. What are a few examples?
- We must continue to innovate. In order to keep relevant for the waves of future retirees, we must develop new products and solutions for them and always be “thinking outside the box”;
- We must educate. We all have to do a far better job of helping people understand the new savings and investment options available to them; and
- We must lead. It's largely up to us in the financial services industry to lead the effort to educate current and future retirees not only about the importance of saving for retirement but also about its attainability.
The Center for Retirement Research at Boston College has calculated, for example, that by saving earlier — i.e., beginning at age 25 rather than 35 — and by working just a little bit longer — until turning 70 vs. 65 — employees can dramatically reduce the percentage of their pay they need to save for retirement.
More specifically, to generate 35% of their total retirement income needs from savings, they can set aside and invest just 4% of their pay, down from 15%. That may not work for everybody, but for those struggling most to make ends meet, it could make it much easier to fit retirement savings into their budgets — and perhaps bring some people into the savings culture who might have otherwise opted out.
It takes time to build a culture of saving for retirement. But we are on our way. Let's finish the job.
Bruce Ferris is president of Prudential Annuities Distributors.