New Analysis Finds Shift from Pensions Reduces Retirement Security

According to a recent analysis by The Wall Street Journal, more than 40% of American households headed by people ages 55 through 70 lack sufficient resources to uphold their current standard of living in retirement. This means that nearly 15 million households must adjust to lower incomes during retirement.

Retirement-aged Americans are less financially prepared than the prior generation, mainly due to high average debt, tuition payments for children, and caring for aging parents. The average 401(k) retirement plan will bring in an average income of only $8,000 a year for a household of two.

For many Americans, the shift from pensions to 401(k)-type plans is the biggest reason for a less secure retirement.

Due to a tax law change that took place in 1978, which authorized executives’ bonuses and stock options to be tax deferred, and the impending 1981-82 recession, many employers began introducing 401(k)s as an option. In the 1980s, about 46% of private-sector workers were covered by pension plans. According to the Employee Benefits Research Institute, the percentage of private-sector workers participating in employment-based defined benefit plans dropped to only 2% in 2014.

Baby boomers were the first generation to be advised to manage their own retirement savings via 401(k)s and similar plans. Consequently, many made poor investment decisions, failed to save enough, or started contributing too late.

Market declines in 2000 and 2008 caused many 401(k) participants to cut back on contributions, or withdraw money to pay bills.

Other concerning statistics highlighted in the study include:

  • The median personal income of Americans ages 55 through 69 leveled off after 2000 for the first time since data became available in 1950. The median income for people ages 25 through 54 is below its 2000 peak.
  • Households with 401(k) investments and at least one person aged 55 through 64 who is working had an average balance of $135,000 in tax-advantaged retirement accounts as of 2016. For a couple between the ages of 62 and 65 who retires today, that would amount to about $600 per month in lifetime annuity income.
  • The percentage of families with debt and headed by people ages 55 or older has steadily increased from 54% in 1992 to 68% in 2016.
  • Americans ages 60 through 69 had about $2 trillion in debt in 2017, which is an 11% increase per capita from 2004. They also had more than six times as much student-loan debt.

Read the full analysis here.

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