In 1972, when Krystyna Strozniak went to work for Western Electric, the former manufacturing arm of AT&T, saving for retirement was the last thing on her mind.
Intent on being a teacher, she soon found herself drawn to a career in telecommunications, a 31-year path that included a succession of technical jobs, the breakup of AT&T and her promotion to a management position in a piece of the company that eventually became part of Verizon. Through it all, she diligently participated in company-sponsored savings plans and enjoyed the security of knowing she would collect a monthly paycheck for life after 30 years of service.
“I never worried about retirement,” she said.
In 2003, Strozniak took the company up on a retirement buyout offer to devote herself full-time to the care of her 12-year-old son. But she opted for a lump-sum payment, which she then turned over to a professional financial adviser, in place of the security of a guaranteed monthly check.
“I don’t think it’s going to be secure and guaranteed,” she said, referring to the promised pension. “I think they may take it away some day. I see businesses now taking away health care benefits and businesses declaring bankruptcy, and they want to get rid of the pensions.”
For much of the last half of the 20th century, the idea of retirement for many Americans included a public or private pension that guaranteed income for life and provided for a period of “golden years,” usually after age 65, spent on leisure, volunteer work or other personal pursuits. But today, the financial security of American workers is more uncertain than it has been in decades. Once reasonably assured of a comfortable retirement, Americans are now watching private pensions collapse and public pensions come under pressure. And even those like Strozniak, whose retirement security was once all but guaranteed, are now finding they have to fend for themselves.
There is mounting research that most Americans are ill-prepared to cope with the task of creating a nest egg to rely on when they’re too old to continue working. They're also woefully unaware of the risks they face in retirement investing. And they're falling further behind in providing for their long-term financial security.
“I don’t think were going to see another generation that’s going to fully retire,” said Doug Lockwood, a financial planner who specializes in retirement at Harbor Lights Financial Group in New Jersey. “There's going to be a lot of people that are going to continue to work for the rest of their lives.”
Long list of risks
As traditional pensions fade into history, employers have shifted the financial risks of a secure retirement to individual workers through company-sponsored savings plans like 401(k)s. No matter how well you save and invest, the list of risks is a long one, according to Alicia H. Munnell, director of the Center for Retirement Research.
“We now have all the risks,” she said. “From the first day, the employee has to decide whether or not whether to join the plan, has to decide how much to contribute, has to decide how to invest those contributions, has to decide how to change those investments over time, has to decide what to do about company stock, has to decide what to do about cashing out when moving from one job to another. And then, at retirement, this person is going to get, if they’re lucky, $100,000 and be told goodbye and have to figure out what to do with that over an uncertain lifetime. So it’s an enormous challenge.”
As employers have shifted responsibility for retirement to their workers, they've also left them largely on their own when comes to learning how to managing their investments. Most individuals are poorly prepared to duplicate the professional investment management that is a critical component of traditional public and private pensions. So even those workers who do accumulate retirement savings are often frozen into inaction when it comes to the daunting task of actively managing their investments, according to Lockwood.
“What a lot of people do with their 401(k) — because they still treat it like a company-sponsored plan — they don’t treat it like their own money," he said. "They put it under the pillow and really don’t think about it.”
Many Americans aren’t even aware of the scope of the financial challenge they face. Surveys repeatedly have found that many Americans have woefully underfunded their personal retirement savings and remain largely clueless about how much more they will need to support themselves once they stop working. More than half of workers 55 and older have saved less than $50,000 toward retirement, according to an April survey by the Employee Benefits Research Institute.
The study also found that half of current workers expect to get by on 70 percent or less of their pre-retirement income. Yet among people who have already retired, two-thirds say the 70 percent level is inadequate. Nearly six in 10 workers haven’t even bothered to calculate how much they might need to live on, according to the EBRI.
How long will you live?
The biggest risk of all — that you might outlive your savings — is all but impossible to predict. Traditional defined-benefit pensions spread that "longevity" risk among a large pool of workers, using actuarial research on predicted life spans. So an investment fund supporting pensioners might have to pay more to those who lived longer than average, but it would pay less to those who died sooner than expected. With individually managed plans, that longevity risk falls fully on each retiree.
Other forces are also chipping away at the financial well-being of future retirees. Changes in Social Security benefits have eroded the security provided by the world's largest government-sponsored retirement plan, as the age at which American workers qualify for full benefits has been gradually rising. Looming deficits in Social Security funding increase the odds of further benefit cuts.
Until recently, historically low interest rates have reduced the amount of income retirees can expect to generate from their nest eggs.
“There’s no silver bullet here,” said Munnell. The solution, she says, is simple but stark: “Work longer and save more.”
Are you at risk?
The risk of coming up short in retirement depends a lot on how old you are, according to a study released this month by the Center for Retirement Research. Older workers are more likely to enjoy the security of a regular monthly check in retirement. About a third of “early boomers” — those born between 1946 and 1954 — face the risk of not being able to maintain their living standard after retirement, according to the center's latest research. For Generation Xers — born between 1965 and 1972 — roughly half are at risk of not being able to retire.
Financing your own retirement is daunting for even the most sophisticated savers and investors. For starters, it means trying to determine how much you’ll need to set aside. For those in their 20s or 30s, the exercise involves the nearly impossible task of predicting the inflation rate for the next three decades. A prolonged period of high inflation like the 1970s will shred even the most conservative plan.
Then there’s the question of determining how fast you can expect your nest egg to grow. While historical returns of the stock market have averaged more than 12 percent over the past seven decades, that average hides the devastating impact of a rough patch in the financial markets, like the prolonged inflation of the 1970s or the raging bear market that followed the bursting of the Internet bubble in 2000.
For example, a worker who invested $1,000 in stocks in 1964 and retired 35 years later in 1999 would have accumulated more than $60,000, adjusted for inflation, based on the return of the Standard and Poor's 500 index. But if that same worker started saving just three years later, investing $1,000 in stocks in 1967, that nest egg would be worth about half as much in 35 years — due largely to the heavy back-to-back stock market losses just before retirement. A lot of the success of your retirement plan rests on dumb luck.
For some workers, just setting aside the money to invest is an insurmountable hurdle. Dennis Mallum, a cement truck driver in central Illinois, began working when he was 13, washing dishes after school.
“I’ve never made enough money to put anything away,” he said. “I’ve made enough money to pay my bills, and that’s the ways it’s always been.”
His 50-hour workweek includes stints as a volunteer firefighter and emergency medical technician. Now, at 51, Mallum said he suffers from arthritis that may eventually prevent him from working.
“I hope like hell that Social Security is going to be there when I retire,” he said. “Because that’s what I’m going to have to live on.”