“I’ll never retire” is a phrase you’ll hear from many of today’s workers. In fact, a survey by Bankrate.com found that 75% of working respondents said they would never retire, or at least to work throughout retirement, which sounds a lot like the same thing. A working septuagenarian majority would be quite a gap from today’s working retirees.
Starting from those nearing traditional retirement age, those 55 to 59, there is still a high proportion of the population in the labor force. (Besides working individuals, “labor force” includes those not employed but actively looking for work, i.e., “unemployed”.) The ratio of men in this age group within the labor force is about three times the number outside of it, and for women about two to one. Looking at the 62-64 age group we see that the ratio of men not in the labor force is now nearly as high as for those still working and for women, there are now more out of the labor force than within.
By the age of 70-74, there are nearly four times as many men not working as working, and for women, more than six times. Finally, for those retirees 75 and older, more than 90% of the men are not in the labor force, along with more than 95% of the women.
The bottom line is that workers are retiring – generally in their 60s – and staying retired. It is a very small percentage of workers who retire and then rejoin the workforce. This is at odds with the expectations of today’s workers. According to the Employee Benefit Research Institute (EBRI), today’s average workers expect to retire at about age 65 (which is actually a little later than today’s retirees), while at the same time, two out of three workers expect to work “as long as they can” in retirement, presumably, into their 70s, 80s and 90s.
But this has been the case for nearly two decades, as long as EBRI has been asking the question. Since the late 1990s roughly two out of three respondents affirmed that they expected to work in retirement, and every year the percentage of actual retirees who had ever worked for pay was significantly lower. In fact, in 2015, only 23% of retirees said they had ever worked in retirement, a percentage actually lower than the average of the last two decades.
Besides the oxymoronic concept of working during retirement, the evidence shows that such expectations are not reality. According to EBRI, half of current retirees did not retire when they intended. The most common reason given was due to a health issue or disability (60% of early retirees). Other common reasons were job or industry changes as well as changing family circumstances.
Remember also, that an even smaller percentage of retirees are working at the same level of income or output as they did in their younger years. A study by AARP found that roughly three times as many workers over the age of 65 work part-time compared to workers aged 25-64 (40% versus about 14%).
The majority of today’s retirees have retired by the age of 65 and the vast majority of them never go back. Many of these retirees are busy with volunteer work, traveling, hobbies, family and more, but most are not working for pay. Fewer than one in seven men over the age of 65 and one in ten women are working full-time. And while the number of workers over the age of 65 will likely modestly increase in the years ahead as longevity and health improves, it will be generations, if ever, before the majority of 75-year-olds are still earning a paycheck.
Myth #2: "I'll Live Off My Savings
But for many retirees, not for very long. According to the 2016 survey from the Employee Benefit Research Institute, when current retirees were asked if they had saved for retirement before they retired, 36% of today’s retirees said that they went into retirement without saving anything for it. And for those who had saved, most hadn’t saved a lot. Not including the value of any traditional defined benefit pension plans (or Social Security), a majority (54%) of those surveyed said they had saved less than $25,000 for retirement. Interestingly, this is the same percentage reporting the same in 2004, despite 12 years of inflation since then. Despite the fact that at least seven out of ten workers expect to earn a retirement income off their savings and investments, today’s world of nearly 0% interest rates and modest accumulated savings suggests that a very small percentage of retirees will earn a significant income off their investments.
While we might think that today’s retirees would naturally have higher levels of financial assets given the extra years of savings today’s workers have, their respective amounts of accumulated assets isn’t significantly different. The percentage of retirees with less than $25,000 in financial assets is nearly identical (55%) to today’s workers. The only significant difference is the percentage of those with saved assets of more than $250,000, where just 19% of today’s retirees and 14% of today’s workers have reached such a level. Compare these amounts to the three-quarters of workers who believe they will need to save at least $250,000, and the half of workers who believe it will take at least $500,000 to provide a comfortable retirement.
Slightly more than a quarter (29%) of retirees and workers (26%) reported that they had saved $100,000 or more for retirement. But as I looked at in my last article, given today’s miserly rates of interest, substantially higher levels of savings will be required to provide a material boost to retirement income. A hundred thousand dollars earning 2% per year is just $2,000, or about $167 a month. Even $500,000 earning 4% a year will provide a modest $20,000 a year. Because of the sharp decline in interest rates, it will require significantly more financial assets to finance the same income level. A retiree 20 years ago might have been able to earn a safe 6% on his or her savings in a Certificate of Deposit. A 2016 retiree earning less than 2% per year on the same investment would need at least three times the level of saved assets to produce the same income.
Myth #3: “My pension will take care of me.”
According to the Bureau of Labor Statistics, the percentage of private-sector workers covered by traditional pensions had fallen to 18% by 2011, from 36% just twenty years earlier, in 1991. The percentage of private-sector workers participating only in a defined-benefit pension plan declined from 28% in 1979 to just 2% today. Over the last few decades, the shift from traditional pensions to defined contribution plans (401(k)s, 403(b)s and similar self-directed plans) has been profound. According to EBRI, among active-worker retirement participants, the percentage of workers whose company retirement plans consisted solely of a traditional pension plan declined from 62% in 1979 to under 10% today.
Over barely more than a generation, the decline in traditional pensions has completely changed the retirement landscape in America. The decline of American pension plans has had the most profound impact on the way Americans save (or don’t save) for retirement. While at one time the majority of workers relied on traditional pensions for the majority of their retirement income, today it is a small and shrinking share of workers who rely on traditional pensions for any retirement income.
The percentage of Americans who expect to receive income from traditional pension has not declined significantly, despite the rapid fall in traditional pensions. EBRI’s survey finds that 56% of today’s workers expect to receive income from a traditional pension. That’s interesting, because it’s higher than the percentage of current retirees (50%) who report receiving any pension income. It’s also higher than the percentage (43%) of retirees the Social Security Administration reports as receiving pension income. Both of these are higher than the 31% coverage that the Federal Reserve estimated in 2010, including current retirees and worker coverage under previous jobs that are no longer accruing benefits (i.e., “frozen”).
Compare also the 56% of workers who expected to receive pension income to the 35% of the same EBRI respondents reported that they or their spouse is currently covered by a defined-benefit pension plan. It is curious that a much larger percentage expect to receive a pension than are currently eligible. But given the rapid shift away from traditional pensions, workers who are not currently covered by such a plan, should not expect to receive one, either at the same employer or another. Even government employers, a traditional provider of pension plans to nearly all of its employees, are turning away from pension plans for new employees and converting plans to more taxpayer-friendly defined contribution plans.
Given the monumental decline in pension plans and participation over the last 40 years and especially the last 15, the percentage of today’s workers and tomorrow’s retirees receiving traditional pension benefits will undoubtedly fall further in the years ahead. Many current workers are simply having unrealistic expectations of receiving a traditional pension. In fact, the very low interest rates of the last decade have made it even more expensive for companies to offer pension plans and will only hasten the decline of traditional pensions.
The declining share of those receiving a traditional pension in America will see an increasingly difficult path to retirement security. Many are overly optimistic about the income from employment they will earn, the pension income they will receive, and the amount of income they will earn from their investments in retirement. A survey by the National Institute on Retirement Security found that 87% of workers believed all Americans should have a traditional retirement pension for retirement security and 84% said policymakers should make it easier for companies to offer traditional pensions. I am in complete agreement with those sentiments, but unfortunately a multitude of factors, ranging from demographics to unrealistic and over-promised retirement benefits to healthcare costs to interest rates to overly aggressive investment return assumptions and others, ensure that pension participation will continue to fall in the U.S. And the retirement gap between those with a (full) pension and without will continue to widen.
The traditional three legged stool of retirement income and financial security included Social Security, pension income and investment income. For now, Social Security seems stable, although the yearly inflation adjustments have been non-existent or negligible in recent years, making it difficult for retirees to pay for the real yearly increases they see in taxes, services, healthcare and other expenses. Pensions have now been in decline for several decades, with no letup in sight. The last decade has seen thousands of pension plan closures, freezes (which limit retirement income for participants) and conversions to defined contribution plans. Many of today’s workers hoping for traditional pension plan income won’t see it. And many who will receive a pension will see less than they expected.
Lastly, the level of accumulated assets achieved by retirees has not grown appreciably over the last two decades, despite much higher living expenses today, particularly healthcare costs, housing and taxes. Worse, the very low interest rates of today and probable low average investment returns for the next decade or two will result in lower levels of retirement income from the same level of investment assets. Retirees wanting to replace a traditional pension plan paying an income of $20,000 or $30,000 a year will require saved assets of $500,000 or more, an amount relatively few will achieve.