The concept of retirement has evolved over the decades—but one thing that has not seemed to evolve is the lack of preparation. Looking at the statistics and various survey results paints a scary picture of an aging American population that does not understand the financial realities of retirement and a lack of urgency for saving and investing for the future. Adding to the dilemma is a disconnect from reality when it comes to the eventuality of declining health and a need for long term care.
The lack of understanding and urgency cuts across all generations from Baby Boomers that are on the cusp of entering their 80s, to Millennials who are now in some of their best earning years. A perfect storm of demographic realities, ignorance, and unprecedented current events have come together to whip up a real crisis situation for Americans’ retirement years. Understanding these underlying factors and digging into the data paints a scary picture, but there are initiatives moving forward in Congress that can increase awareness and access to vehicles to help people save for retirement and better manage their long term care needs.
In the best of times, preparing for and living in retirement is a challenge. But since 2020 some unique conditions have descended upon the world that are having a particularly harsh impact on the retirement prospects of Americans.
Three major events have conspired to challenge people’s retirements considerably, and don’t seem to have any end in sight.
1) COVID (U.S.)
- Estimated cost to economy over $12 trillion
- 80.3M infected / 985,000 killed
- Huge shift in employment patterns
- Kicked off supply chain disruptions and inflation spike
- 2) Inflation
- CPI rose 8.5 percent in March—highest in 40 years
- Federal Reserve approved .25 percent rate hike for first time since December 2018
- Fed indicated more rate hikes at each of the remaining six Federal Reserve meetings in 2022 targeting a rate of 1.9 percent by year end
3) Ukraine War
- Further impacts to inflation
- Food costs
- Supply disruption
- No existing path to end the war in foreseeable future
Population and Longevity
The U.S. is an aging population that has been experiencing a decline in longevity. Over the last two years average life expectancy has declined from 78.9 years to 76.6 years placing the U.S. as much as five years behind many other comparable western nations.
- Number of Americans—332,403,600 (1/1/2022)
- Number of Americans age 65+—55 million (16.9 percent of the population) *73 million (21 percent of the population) by 2030
- Life Expectancy—76.6 years *Male—75.1 years/Female—81.2 years
- A 65-year-old today has a 35 percent (male) or 46 percent (female) chance to live to age 90
- U.S. life expectancy has decreased two years in a row
- 2025-Baby Boomers start turning 80
*U.S. Census Bureau
The average income of people 65+ is below the national average income, mostly due to retired status. The amount saved in retirement accounts for people 55-65 is twice the national average, but still far below what would be adequate to sustain a retired household for the duration of average life expectancy.
- $53,490—Average income 40hr/week worker
- $38,515—Average income 65+
- $170,516—Average net worth 65+
- $65,000—Average amount in U.S. retirement accounts
- $135,000 ages 55-65
- $13,000 workers aged 35 and under
Federal Reserve Survey of Consumer Finances and GAO
Underfunded for Retirement
The percentage of income saved it would take to replace 70 percent of pre-retirement income levels doubles from age 35 to almost impossible levels when delayed to age 45. Making matters worse is that almost half of people during peak earning and savings years are dipping into retirement accounts at exactly the time they need to be adding to them.
- Replace 70 percent of pre-retirement income
- Save 24 percent of income start at age 35
- Save 44 percent of income if start at age 45
- One guideline says will need to save 10x peak income to replace income during retirement
- 46 percent of workers aged 40-49 have taken money out of retirement accounts
TD Ameritrade and Center for Retirement Research Boston College
Pressure on Retirement Savings
Low savings rates compounded by family pressures to help support generations ahead or behind those during peak earning years has created a distressed “Sandwich Generation” facing imperiled future retirement prospects.
- 30 percent—People aged 55 or older with less than $50,000 saved
- 55 percent—People with less than $10,000 saved
- 33 percent—People with nothing saved for retirement
- 79 percent—Parents continuing to support adult children
- 16 percent—Adult children with parents living with them
Merrill Lynch and Age Wave / GoBankingRates
Continuing to work beyond retirement age
Although an active and purposeful retirement that can also produce income makes for a longer, healthier and more fulfilling life, many people are facing a retirement with no choice but to continue working to survive. Social Security was never meant to be the majority of a person’s income in retirement, but too many people rely on it for the majority or even entirety of their retirement income.
- 50 percent—people rely on Social Security for majority of their income
- 74 percent—people plan to work during retirement
- 46 percent—people plan to work part-time past age of 70
- 18 percent—people plan to work full-time past age of 70
- 12 percent—people said they expect to work their entire lives
SSA / AAG
Retirement savings not keeping pace
American savings rates spiked in 2020 during the lockdown and stimulus period, but rates are returning to historic levels and people are feeling the crunch from inflation further eroding their ability to save and invest for the future. Not enough workers are taking advantage of employer sponsored retirement plans and almost half of the Baby Boomers have reached retirement age.
- 13.7 percent—Personal savings rate in the U.S.
- $55,000—Average spent on living expenses aged 65-74
- $56,632—Average household retirement income
- 56 percent—Workers enrolled in workplace retirement plan (72% have access)
- 47 percent—Baby Boomers now retired
GoBankRates / CNBC
Debt in retirement
Debt has become a growing element in retirement unlike the past. Seniors are now carrying more debt into their later years than ever before, which has a substantial draining effect on their savings and income as they pay interest and continue to carry and service these liabilities.
44 percent—Americans aged 60-70 carrying a mortgage into retirement
- 62+ own $8 trillion of home equity
- 471 percent—increase in debt level for aged 60+ over last decade
- $96,945—average debt for aged 56-74
- $40,925—average debt for age 75+
- Housing/School Loans/Medical Bills
American Financing / NRMLA/ Federal Reserve Bank / GAO
Impact of health and long term care costs
The ticking time bomb for the majority of retirements is the lurking specter of failing health and the expensive costs of long term care.
- 70 percent of people over age 65 will need formal long term care
- Number of people receiving long term care:
- Home—12 million
- Skilled nursing facility—1,347,600
- Assisted living—811,500
- Average couple retiring in 2019 at 65 will spend $285,000 on medical costs in retirement
HHS / CMS / Fidelity
Who pays for care?
Long term care is a very expensive proposition, and too few people adequately plan for or can handle these costs once they arrive. Coverage from Medicaid and Medicare is not guaranteed and limited in its scope. Much of the burden falls on family care givers and costs being covered out-of-pocket.
- Costs of care
- SNF—$7,900 (semi-private)/$9,000 (private)
- Funding Sources
- Entitlements—35 percent (Medicaid)/25 percent (Medicare)
- Private Pay—four percent (LTCI)/33 percent (Out-of-Pocket)
- Insurance Policies
- LTCI—7.5 million (seven percent of adults over 50)
- Life—255 million
Genworth / CMS / ACLI
Who is planning for the costs of care?
There is a major disconnect between what people believe for their own futures in retirement and the realities of long term care. People say they would seek long term care insurance if they experienced a health crisis but have done little to no planning. They believe they will be able to handle long term care in their future if needed, but don’t think it will ever happen to them.
- 62 percent would be prompted to purchase LTCI based on a health crisis
- 64 percent have done little to no planning
- 82 percent believe they will be able to afford and access the care they want when they need it
- 85 percent don’t believe they will need care in the future
AARP / MassMutual / Genworth
Safety Net: Social Security
Too many people believe they will be able to retire on Social Security, only to discover that what they may receive as a monthly benefit is not enough to live on.
- 52 million—people aged 65+ collecting
- $2,364—Maximum benefit at age 62
- $4,194—Maximum benefit at age 70
- $1,564—National average benefit
- $19,560—Income maximum before triggering taxes on Social Security benefit
Safety Net: Medicare
People are often surprised to discover that Medicare is not one-size-fits-all and they must configure the coverage that best matches their needs, and that Medicare requires premiums, deductibles, and co-insurance that varies based on coverage.
- 64 million—people 65+ enrolled
- 36 million Traditional plan
- 23 million Advantage plan
- Part A (Hospital) premium—$274-$499 + deductibles and coinsurance
- Part B (Doctor) premium—$170 and up based on income + deductibles and coinsurance
- Part C (Advantage) premium—Varies by plan selection
- Part D (Pharmacy) premium—varies by plan selection and income
Political leaders fully understand the seriousness of the growing retirement and long term care crisis. A number of legislative initiatives have been introduced on Capitol Hill designed to help people better plan for and live in retirement.
1) Social Security Act 2100
- Increase the minimum monthly benefit for low-income retirees
- Revise how the cost-of-living-adjustment formula is calculated to reflect the realities of the cost of living for seniors
2) WISH Act
- Help more people access long term care insurance coverage
- Create a new federal long term care insurance trust fund through a payroll tax of 0.3 percent on both workers and employers
3) AGE Act
- Provide financial relief for family members acting as caregivers
- Create a tax credit for the loss of income and out-of-pocket costs for people providing care for an aging relative
4) SHPA Act
- Allow seniors who need funds for health and long term care expenses to use tax-free proceeds from selling their life insurance policy through a life settlement
- Funds placed in an HSA style account (Senior Health Planning Account) dedicated to covering qualified health and long term care related expenses are tax-free
5) SECURE Act and RISE Act
- Provide more incentives and opportunities for Americans to better prepare for retirement
- Mandatory automatic enrollment provision for new retirement plans
- Increased tax credits for small business owners to offer retirement plans to employees
6) Medicare Part B Premium
- Reconsider the 14.5 percent Medicare Part B premium increase from $148.50 in 2021 to $170.10 in 2022
- Related to the new Alzheimer’s drug Aduhelm
- Estimated to cost $56,000 a year per patient
Progress is being made on a number of these legislative initiatives that have been introduced into Congress.
1) SECURE Act
H.R. 2954 the “Secure Act 2.0” was passed in the House of Representatives by an overwhelming bi-partisan vote of 414-5. The measure now goes to the Senate and if passed there is sure to be signed into law by the President.
- Automatically enroll employees in a 401K plan contributing three percent of their salaries and growing up to 10 percent (employees can opt-out)
- Catch up contributions to tax-deferred savings accounts would increase to $10,000 for people ages 62, 63, and 64
- Age to start taking required minimum distributions (RMD) would increase from 72 this year to 75 by 2032
- People with student loans could receive employee matching contributions to their loan payments
2) Medicare Part B Premium Increase
CMS indicating that the 2022 Part B premium increase will be eased back as the use of Aduhlem will be restricted to beneficiaries participating in qualifying clinical trials.
- CMS official decision expected soon
3) LTC-Life Settlements
Legislative and regulatory support remains strong across the country for LTC-Life Settlements as an innovative way to help people pay for the expensive costs of long term care, delaying the need for people to go onto Medicaid and saving tax-payers millions of dollars every year.
- SHPA act remains active on Capitol Hill
- NAIC previously endorsed LTC-Life Settlements
- NCOIL previously endorsed LTC-Life Settlements
4) Conning and Co. Research
“What is new is the concerted effort to integrate life insurance policies and long term care providers. This new source of funds represents a potential alignment of long term care providers and state governments. Both state governments and the long term care industry are working to find a solution to the budgetary threat to Medicaid created as aging Baby Boomers impoverish themselves in order to have the state pay for their care.”
5) Social Security COLA
Social Security enacted one of the largest COLA increases in years for 2022 and based on current inflationary projections an even larger COLA increase could happen in 2023.
- 2022- 5.9 percent
- 2023- 8.9 percent?
Myths and Realities
The bad news is that numbers don’t lie. Based on the math it is clear that there is a major deficit between what Americans need for a secure retirement and what they are saving. Complicating matters is the fact that statistically people’s perceptions about aging, retirement, and the eventual need for expensive long term care services are opposite of reality.
- U.S. is an aging population with a declining life expectancy and limited financial safety nets
- People are underestimating the costs of retirement and not adequately preparing
- People are carrying too much debt and other burdens into retirement
- Social Security is not enough to live on
- Medicare comes with significant costs and is not one-size-fits-all
The good news is that there are a number of options available to help mitigate this growing crisis at both a national and a personal level.
- Legislative action is increasing to address the growing crisis
- Tax advantaged retirement savings vehicles are not being fully utilized but more education and access can increase participation
- COVID has increased the value of insurance in the eyes of the public
- The use of alternative financial solutions for seniors such as Reverse Mortgages and Life Settlements is growing with the aging Baby Boomer population
- Agents and advisors are uniquely positioned to be problem solvers vs product sellers
To overcome this crisis, it will take thinking globally and acting locally. Understanding the lack of awareness and even grip on reality that cuts across the generations about their financial futures in retirement is the key to becoming a problem solver for clients. Through the efforts of agents and advisors there are many opportunities to help people better plan for a more secure retirement. Understanding the realities of where most people are when it comes to planning for the future will help advisors give better advice and guide people to the right solutions to meet their unique needs.