The large baby boom generation has started its prolonged transition into their retirement years. But, whether these will, in fact, be their golden years is a grave concern.

Despite the growing media focus on the importance of saving for retirement, far too many people are ill-prepared. According to a 2016 survey by GoBankingRates, and reported by Time, one-third of all Americans have no retirement savings at all, and only 13 percent of Americans have $300,000 or more saved.

In case you think it is only one survey, an Employee Benefit Research Institute survey found that 57 percent of workers reported “that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. This includes 28 percent who say they have less than $1,000 in savings.”

The typical financial advice is that retirees need to replace 70 percent to 90 percent of their pre-retirement incomes in order to enjoy a secure retirement. A portion of this income replacement for most workers will come from Social Security. But, Social Security is insufficient.  In 2016, the average monthly Social Security payment was $1,360 a month, or $16,320 a year. Therefore, if a person was earning the average income in the U.S. ($56,516), then he or she would need an investment income between $23,000 and $35,000 in addition to Social Security to meet his or her target retirement income.

Based on a $500,000 portfolio (well in excess of the average person’s savings), such a retirement income would require that the portfolio provide income of 5.0 percent to 7.0 percent annually, without reducing the size of the portfolio, and provided that the portfolio also grows with inflation. Since it is wise for retirees to invest in portfolios that contain less risk, such a return scenario is unlikely. Therefore, under these assumptions, even a $500,000 portfolio could be too small.

The key lesson is that the current savings pool for retirement is insufficient and an acceleration in saving and investing for retirement is necessary. For more and more Americans, saving for a secure retirement depends upon having the option to minimize their taxes, and where possible to receive employer contributions to their retirement, through tax advantage retirement accounts, such as 401(k) and 403(b) retirement plans –  403 (b) retirement plans are similar to 401(k) plans, but are available to certain public school employees and employees of tax-exempt organizations.

These savings vehicles emerged from an obscure part of the tax code – section 401(k), hence the name. Due to the power of compounding interest and returns, the importance of 401(k) accounts cannot be understated. They enable retirees to more effectively grow an investment portfolio to acquire the assets necessary for a secure retirement. However, like all regulations, the creation of 401(k) accounts has also created many unintended complications, costs, and risks.

For instance, all market investments, such as 401(k)s, are subject to risks. These risks, if not managed well, can make it more difficult for retirees to consistently meet their targeted incomes. While some issues are beyond any individual’s control (such as whether the government will implement a pro-growth policy mix that accelerates overall income growth), financial instruments such as low-cost income annuities, if managed properly, can be valuable tools to achieve these goals.

The value of low-cost income annuities is particularly noteworthy for the majority of Americans who do not have access to a defined benefit retirement plan. Income annuities provide defined payouts either for a lifetime or a specified period, and can be fixed, variable, or fixed with inflation compensation. Incorporating annuities into 401(k) or 403(b) retirement plan creates an investment income source whose dollar value is pre-defined in addition to Social Security payments. Such certainty is beneficial for meeting the specified targeted income level and enabling a more effective allocation of a retiree’s other pension assets.

Ultimately, a secure retirement for many Americans will be based on the combination of Social Security, appropriate market investments, and effective use of low cost annuities.

Despite the pressing need for workers to fund their retirement, saving for a secure retirement is an overwhelming topic for many people, which is made worse due to the current complex tax system. The hope of creating a secure retirement depends upon navigating this complex web of numbers, investment strategies, costs, government policies, and taxes. Toward this end, it is crucial that people have the resources, understanding, and financial discipline to overcome these challenges, whether they are 30-months, or 30-years, from retirement.

As part of its mission to “clarify the crucial economic issues and debates”, EconoSTATS is embarking on a long-term research program intended to provide the resources and understanding related to the looming retirement challenges. The research program is taking two perspectives.

First, an economic perspective will provide insights into the broader retirement questions to help demystify the complex policy world as it relates to retirement. For instance, people can face excessively high penalties if, in response to an unexpected problem (such as a family emergency), they need to turn to the wealth they have amassed in their 401(k) accounts. As a consequence, what policy reforms would minimize these costs?

Other crucial policy questions include assessing the impact from the government’s unfunded liabilities on the ability of people to have a secure retirement; and assessing whether public pension asset managers who consider divestment strategies against select industries are hurting returns, and therefore, endangering people’s retirement security.

Second, a personal finance perspective, will provide insights regarding the costs and benefits of alternative financial investments, personal investment approaches, and personal retirement strategies. The personal finance perspective will provide pragmatic insights that will help demystify the complex world of investing.

The goal from this program is to provide a valued resource that helps encourage positive solutions to the looming retirement problems that too many people currently face. We look forward to embarking on this journey and welcome your comments, suggestions, and input.


Wayne Winegarden, Ph.D. is the Managing Editor for EconoSTATS and a Sr. Fellow in Business and Economics at the Pacific Research Institute

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