The U.S. economy seems to have created a clear division between those who have enough and those who do not. This division is also apparent among retirees, with an estimated $84 trillion expected to shift from older to younger generations by 2045. However, despite this massive wealth transfer, there are concerns about a looming retirement savings crisis for those who have not adequately saved for their elder years.
According to Chayce Horton, a senior analyst at Cerulli, the wealth transfer is likely to be concentrated in fewer and older hands, with high-net-worth and ultra-high-net-worth households accounting for a significant portion of the transfer. In fact, Cerulli estimated that $35.8 trillion, or 42%, of the wealth transfer will come from these households, which represent just 1.5% of all households. High-net-worth households are defined as those with $5 million or more in investable assets, while ultra-high-net-worth households have $10 million or more.
Covering the cost of retirement has become increasingly challenging due to inflation and rising healthcare expenses. Fidelity estimated that a 65-year-old single individual may need around $157,700 to cover healthcare costs in retirement, while an average retired couple of the same age would need about $315,000. These escalating costs, combined with low retirement balances, have raised concerns about the potential for a retirement savings crisis.
The Perception of a Crisis
A recent survey from the National Institute on Retirement Security found that 79% of Americans believe there is a retirement crisis, up from 67% in 2020. More than half of respondents expressed concerns about not having financial security in retirement. Despite the average overall 401(k) balance being $125,900 in the first quarter, many Americans do not have access to workplace retirement savings accounts, further exacerbating the issue.
In response to the retirement savings crisis, some experts suggest implementing mandatory savings plans that would require all individuals to participate. Teresa Ghilarducci, a professor of economics, emphasized the importance of compound interest in building sufficient retirement savings. She proposed that mandatory participation in pension plans from an early age is essential to supplement Social Security benefits in retirement.
Ed Murphy, president and CEO of financial services provider Empower, highlighted the success of forced savings approaches in increasing retirement savings participation. He noted that individuals earning $35,000 to $50,000 who do not have access to workplace retirement savings plans are unlikely to save anything. However, once they have access to such plans through payroll deductions, up to 90% of them will start saving.
The ongoing wealth transfer and challenges of rising retirement costs highlight the urgent need to address the retirement savings crisis. While concerns about financial security in retirement are growing, innovative solutions such as mandatory savings plans could help ensure a more secure future for all Americans. It is crucial to take proactive steps to encourage saving and provide adequate resources for retirement planning to avoid a potentially dire financial situation in old age.