The “Retirement Crisis” has become a buzzword: If someone mentions it in a group conversation, many will nod knowingly, as if they share the same understanding of the term, but later they may secretly Google it to try to understand what it actually means. While many consumers may have a vague idea that a crisis that is tied to retirement exists, it’s normal to have a lot of questions about what the “Retirement Crisis” actually means.
The “Retirement Crisis” has become a buzzword: If someone mentions it in a group conversation, many will nod knowingly, as if they share the same understanding of the term, but later they may secretly Google it to try to understand what it actually means. While many consumers may have a vague idea that a crisis that is tied to retirement exists, it’s normal to have a lot of questions about what the “Retirement Crisis” actually means:
- How crisis-ey is this crisis? How extreme?
- Who does it apply to? Just those who are retiring soon? Those already in retirement? Everyone?
- What can I do? Is there any stopping the crisis?
- How does this situation impact me?
As with any critical situation, being informed will best prepare you to take action. Let’s take a closer look at some of the factors fueling anxiety around retirement.
What is the “Retirement Crisis” Actually Referring to?
By most definitions, the Retirement Crisis discussed in the media exists within the US retirement system that consists of Social Security, traditional pension plans at state and local governments, legacy pension plans sponsored by private sector employers, and retirement savings plans, such as 401(k) plans.
The word “crisis” indicates the significant gap between the amount of money many retirees and near-retirees have saved and the amount they will need to sustain them throughout their retirement years. In short, the Retirement Crisis describes the sheer number of Americans who find themselves with insufficient savings or sources of income to live on in retirement. Here are some of the factors that contribute to this ever-widening gap:
- Increased longevity and healthcare costs: Not only do retirees have to budget for longer lifespans than generations before them, they also have to budget for the healthcare that sustains those extra years of life. For some Americans who are starting their retirement before they’re eligible for Medicare, they can vastly underestimate their out-of-pocket costs. The average couple is expected to need $285,000 in today’s dollars for medical expenses in retirement, excluding long-term care.1 However, while costs for healthcare continue to rise, Americans’ understanding of what Medicare will and will not cover remains unclear, likely a reason many pre-retirees underestimate their healthcare costs in retirement.
- Overreliance on Social Security: Americans overestimate how much income they’ll get from Social Security by over 27 percent, on average, according to a recent survey from the Nationwide Retirement Institute.2 In addition, many retirees draw on their benefits early, providing them a lower monthly payout. Seventy percent of respondents to this same survey believe they’re eligible for full benefits before they actually are.3 On average, future retirees think they can tap into Social Security at age 63, and 26 percent believe that if they claim early, their benefits will automatically increase when they reach full retirement age.4 (For clarity, that is not how Social Security works.)
- The vanishing pension: In 1998, 236 companies in today’s Fortune 500 offered a traditionally defined benefit plan, compared with only 13 of those companies today.5 While pensions were more common when baby boomers were entering the workforce, many baby boomers changed jobs over the course of the last couple decades and found themselves in companies that did not offer pensions, as defined benefit plans became more rare. They didn’t start their careers thinking they’d have to plan for pensionless futures and are now faced with the challenge of making up for this shift in the retirement landscape late in their earning years.
Who’s Impacted? Is it just Baby Boomers?
While those nearing retirement age and those already in retirement may feel the urgency of this crisis, younger generations need to be aware of how they could be impacted as well:
- Millennials are facing their own set of financial struggles and increasing expenses that could compound to make retirement seem unaffordable. This group of young adults – specifically those born in the 80s – graduated college amid a great recession, and they fed increased costs of living. While wages have continued to increase, they haven’t kept up with rising costs of living: Rent, home prices, and college tuition have all risen in price faster than incomes in the US.6 Coupled with multiple recessions in their first decade of earning, the combination of mounting debt and fewer earning opportunities means that this generation is worth 34 percent less than they would have been had the recession of 2008 not occurred, compared to 18 percent lower wealth levels for those born in the 1970s, and 11 percent lower wealth levels for those born in the 1960s.7 All of these obstacles make saving for retirement an even more formidable challenge than it was for previous generations.
- Adult children of retirees or near-retirees are also faced with the potential financial consequences of their parents’ retirement crisis, which could end up impacting their own ability to save for retirement. As noted earlier, many pre-retirees underestimate how much they’ll need in retirement, and especially how much healthcare will cost them. These unplanned costs can eventually fall to other family members. And while Americans tend to underestimate their own retirement and healthcare costs, they also underestimate their relatives’ healthcare and caretaking expenses. The average non-professional caretaker spends $7,000 a year in the US on their loved one who needs care.8 This money often comes out of the caretakers’ retirement funds to cover these unplanned costs. AARP estimates that caregivers are spending approximately 20 percent of their income on caring for loved ones.9
Planning for retirement can feel overwhelming under normal circumstances, but watching the economy take a hit from a global pandemic can make it even harder to navigate through later-life financial planning. You may be trying to estimate what your retirement income will be going forward, or if you can still afford to retire by your goal date. The economic impact of COVID-19 can be especially scary if you’re living on a fixed income during retirement.
In addition, the pandemic seems to be driving a surge of early retirements as businesses close or downsize and retirement-aged workers weigh the health risks of continuing to work. The share of unemployed people not looking for work who called themselves “retired” increased to 60 percent in April 2020 from 53 percent in January.10 Unfortunately, even those with substantial retirement accounts may not have enough saved for this unplanned early retirement.
The good news? You can still find ways to protect your income in the face of market volatility.
De-Crisis-ing Retirement: 3 Key Steps
Find a Financial Professional
While the internet may seem to be full of helpful information, it can quickly become overwhelming, and online research alone makes it difficult to tailor a plan to your specific goals, risk tolerance, and preferences. A financial professional can provide clarity, help you determine what steps you can take, starting now, for your financial future and help you identify risks to address that you may not have been aware of.
Before meeting with your financial professional, take a moment to get acquainted with, or refresh yourself on, the expenses you were anticipating in retirement. Jackson’s Retirement Expense and Income Calculator can make it easy to project the income you may need in the future, depending on when you plan to retire. Going into the conversation with your financial professional armed with this knowledge can save you both some time, so that you can make the most of your meeting. The markets may be uncertain, but you can take control of your role in the journey toward a long-term retirement strategy by taking these factors into account.
Develop a healthy understanding of your investment options. Even if you are going to find a financial professional, take the time to understand the products in which your money would be invested. Do you know what stocks and bonds and mutual funds and index funds are? Investopedia and The Balance provide great resources for beginners, and HerMoney and Ellevest both provide investment platforms tailored to women who are starting to invest.
Prioritize Lifetime Income
Most Americans’ top concern around retirement is running out of money. Annuities* can provide income that can last a lifetime. Whether you want to secure guaranteed lifetime income, leave a legacy for your loved ones, or balance some of your higher risk investments, an annuity could be the product to help assuage your retirement anxieties. Annuities are offered in a range of options, providing you the opportunity to pay for only the features and benefits that are important to you. Your financial professional can partner with you to determine the type of annuity that best fits your long-term financial goals, comfort with risk, and vision of your daily life.
*What is an annuity?
Annuities are long-term, tax-deferred vehicles designed for retirement. The principal value of variable annuities will fluctuate based on the performance of the underlying investments and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½.
Add-on benefits, such as those that can provide lifetime income, are available for an additional cost and may be subject to limitations and conditions. There is no assurance that an annuity with an add-on benefit will provide sufficient supplemental income in retirement.
Guarantees are backed by the claims paying ability of the issuing insurance company and do not apply to the principal amount or investment performance of a variable annuity's underlying investments.
1. “How Much Health Care Will Cost You in Retirement, According to Fidelity,” Barron’s, April 2019.
2. “Exclusive: Social Security checks are lower than many Americans expect, survey finds,” Fidelity, April 2018.
3. “Older Americans are relying too much on Social Security as a main source of income,” USA Today, May 2019.
5. “Retirement offerings in the Fortune 500: 1998–2019,” Willis Towers Watson, June 2020.
6. “Home prices have risen 114% since 1960 — here’s how much more expensive life is today,” CNBC, April 2018.
7. “The Demographics of Wealth,” Federal Reserve Bank of St. Louis, May 2018.
8. “Surprising Out-of-Pocket Costs for Caregivers,” AARP, October 2019.
10. “What you can do if you find yourself suddenly retired,” MarketWatch, October 2020.
About the author
Sara Sanford, Executive Director, Gender Equity Now (GEN)
Sara Sanford is the Executive Director of Gender Equity Now (GEN), and the architect behind the GEN Certification, the first gold standard for gender parity in U.S. businesses.
Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, annuities are issued by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York). Variable products are distributed by Jackson National Life Distributors LLC, member FINRA. May not be available in all states and state variations may apply. These products have limitations and restrictions. Contact the Company for more information.
Jackson® is the marketing name for Jackson National Life Insurance Company® and Jackson National Life Insurance Company of New York®. Jackson National Life Distributors LLC.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.
Tom Hurley and Phil Wright are affiliated with Jackson. All other authors are not affiliated with Jackson.