The Looming American Retirement Crisis

looming retirement crisisA lot has been written about the retirement crisis that is tightening its grip on millions of Americans who will not be able to retire. And, the ripple effect has the potential to raise additional havoc when people cannot retire and have to reduce their spending. Companies want them to retire so they can replace them with cheaper, younger employees. The younger employees want their higher paying jobs. And pre-retirees who spend less to save more will put a real damper on the U.S. economy.

A lot has been written about the problem. I will give you some fresh perspective about the looming crisis. You figure out how it may impact you.

Rising Longevity

You will need a lot more assets than your parents because you are going to live longer thanks to medical science and less physically demanding jobs. You need enough assets to survive periods of extremely low interest rates (now), stock market crashes, rising medical expenses, inflation, and a host of other economic conditions that make retirement planning a near impossible task.

Investment Risk

If may be years before a low risk investment strategy will work for you. Fed policy, that is focused on lowering borrowing costs, is killing the concept of conservative investing during retirement years. Rolling a five-year CD that pays less than 1% does not build a lot of wealth.

Americans are going to have to get used to the idea of taking more investment risk during their early retirement years. This means bigger allocations to more volatile mixtures of bonds with longer maturities and common stocks. The good old days of rolling CDs with guaranteed principal are long gone.

Fed Chair Janet Yellen said, “A low-interest rate environment is a tough one for retirees who are looking to earn income in safe investments like CDs or bank deposits.” Fed policy creates low interest rates when it is focused on the economy and jobs. Current and future retirees are collateral damage.

The Ostrich Effect 

According to the Employee Benefit Research Institute, 50% of the work force believe they will not have enough assets to retire and maintain their standard of living. That does not mean the other 50% are flush with no retirement worries. 50% of that group has not done enough retirement planning to know the answer. Or, they bought a cheap plan from salesmen who use the planning process to sell investment and insurance products. The retirement crisis is much bigger than the data shows and it is accelerating as more Boomers reach retirement age – 10,000 per day. 

Running Out of Money

More and more retired Americans will have to dip into principal to make ends meet. Every time they spend a dollar of principal they have one less dollar that can be used to produce future income. This devastating downward spiral spells disaster for millions of Americans.

Unlike some problems that is no easy fix. People have waited too long to begin accumulating adequate assets for retirement.

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