Bloomberg Businessweek March 30, 2020 pp26-28 Finance “Goodbye, Retirement” “The coronavirus and the economic crisis leave many with one fallback: Social Security”
If you stayed invested in equities through the COVID-19 crisis then you might be wondering how this downturn will impact your cash flow in retirement. One group offers a window into that question. The impact depends on how long you have been retired. If the COVID-19 crisis and ensuing stock market crash hit in the 1st year, 5th year, 10th year, 20th year or 30th year of retirement then the likelihood of your 401k funds lasting through retirement are reportedly 41%, 47%, 55%, 65% and 75% respectively.
Looking at “the nest eggs of typical Americans in their mid-50s” those born in 1930-1941, 1942-1947, 1948-1953, 1954-1959 and 1960-1965 the composition of their retirement revenue streams [% Funded by Social Security, Pension (Defined Benefit), 401k etc. (Defined Contribution)] is as follows:
[1930-1941 Total Cash Stream $274,000] 60% SSA, 22% DB, 18% DC,
[1942-1947 Total Cash Stream $328,000] 67% SSA, 17% DB, 16% DC,
[1948-1953 Total Cash Stream $322,000] 67% SSA, 14% DB, 17% DC,
[1954-1959 Total Cash Stream $291,000] 74% SSA, 11% DB, 15% DC,
[1960-1965 Total Cash Stream $226,000] 83% SSA, 3% DB, 14% DC.
See summary and charts below.
So total benefit during retirement peaked for those born 1941-1947 at $328,000 and falls, according to this model, to just $226,000 for those born 1960-1965. The declining trend follows the move away from defined benefit pensions consisting of 22% of a retiree portfolio for those born in 1930-1941 to only 3% for those born 1960-1965 and the rise of Social Security consisting of 60% and 83% respectively. Independent investments and later 401K have fallen especially for retirees born after 1954 from 18% to 15% and 14% respectively in dollar terms from $49K to $44K and $31K. The 1960-1965 group being hurt, to a greater extent, by the 1990 tech-bubble burst and the 2007 mortgage meltdown.
All charts below adapted from the reference. Horizontal Axis is Birth Year Interval.
Clearly, the replacement of defined benefit pension plans for 401k defined contribution retirement schemes has placed all the investment risk on the individual. This during a period when it became harder than ever to save for retirement. In the past, older individuals could make their retirement money last longer by continuing to work. Working longer delayed taking Social Security benefits and increased their tax-deferred savings. Even before the COVID-19 crisis, older workers, forced to change jobs, were struggling to find well-paying jobs. With COVID-19, employment for older workers, at any wage, may not be medically safe and will be harder to find.
Younger workers are more vulnerable then they might know. Many may find themselves muddling through the COVID-19 economic slowdown by drawing down on their recently battered 401k accounts. Such action, as necessary as it might be, has long-term implications. What about catching up for lost ground? Even before the crisis most elders would advocate that younger earners spend less and save more. Having said that, boosting contributions an absolute 5% is harder than one might guess and in the big-picture younger earners saving that much more would see the “risk of falling short in retirement [fall] from 50.2% to 47.1%”. With all this in mind how do these sources of funding support retirement life? As you might have guessed from the data shown, “Savings are important for short-term needs”…”But what you need in retirement is insurance, and that’s what Social Security provides”. “Even wealthy Americans love their Social Security especially at times like this”.
What are potential solutions for helping the middle class build a better retirement?
1) Buffer individual efforts by sharing investment risk. This can be done by moving away from 401k investment schemes to programs that are insured. For example, “…annuity-like insurance products that guarantee income for life”.
2) Boost Social Security. As discussed above and shown in the charts, “About half of retirees rely on Social Security for most of their income”. Consequently, keeping Social Security functioning well is of critical importance for current and future retirees. As most of us have heard, the future of Social Security funding has been questionable and likely to fail by 2035. As a remedy, some suggest a untenable solution that reduces benefits by 20%. Not surprisingly, the COVID-19 crisis will only add to the Social Security woes. Job losses equates to fewer workers paying in and more individuals starting Social Security. As an initial fix for dealing with the COVID-19 impact, Senators Warren, Schumer and Wyden want to "Boost Social Security" by $200/month for the next two years.
“Today as businesses…go begging for bailouts, retirees-and the millions who hope to get there-may demand their own rescue package”.