Grandma's much-anticipated Arctic cruise becomes a slow drift away on an ice floe. Grandpa mortgages his kidneys to pay for a new heart. Social Security is deader than disco and "IRA" only refers to guys named Ira.
That bleak vision is only a slight exaggeration of the catastrophes foretold by many experts, the media and financial firms. It’s a scare tactic that’s moved the tone of the U.S. savings and retirement conversation from a constructive call to action to an alarmist frenzy. No one argues that building a solid financial future is easy -- wages are stagnant, markets have been disappointing and Americans are getting older and living longer. Still, retirement isn't going the way of the carrier pigeon. Innovative retirement plans and new policies and products point to a future richer than many workers imagine.
The Fear Factor
Fear is a poor motivator, as those who advocate exercise and smoking cessation know. Environmentalists have also figured this out. One study found that the more catastrophic the prediction about climate change, the more skeptical listeners became. Dire scenarios often cause people to give up, throwing up their hands in the face of a seemingly insurmountable challenge. It’s something Erik Carter, who travels around the country for financial education firm Financial Finesse, sees all the time. When he speaks with workers about retirement, pessimists far outnumber optimists: "They're discouraged to take any action, because they just don't think they're going to retire."
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At the heart of their fear is the fate of the financial safety net we subsidize with every paycheck. Just 6 percent of the millennial generation expect to get their full benefits from Social Security, according to the Pew Research Center. Half believe they'll get nothing at all. The trust fund built up to pay for Baby Boomer retirements does run out in 2033, but even then Social Security should be able to pay 77 percent of benefits. And that's assuming politicians can't find extra revenue for what is arguably the government's most popular and effective program. Pew finds more than 80 percent of all generations, including millennials, support Social Security and Medicare.
The situation for Medicare and health care in general is shakier, but there are signs that the growth in costs is slowing down. The federal government's ten-year spending projection for health care has fallen $900 billion since 2011.
If Social Security survives, or even expands, that covers only the barest necessities. The rest will need to come from savings invested in a market that just loves surprises, often unpleasant ones. Again, the long view provides comfort. Even baby boomers have time on their side, with decades more to save and plan. Small changes now -- paying more attention to fees and setting up automatic savings accounts, for example -- pay off later. And the fees we pay to save for retirement have dropped tremendously over the last generation. Some predict they'll fall almost to zero.
Credit all the negativity for one thing: Most policymakers and companies now admit there’s a problem with a retirement system that asks everyone to structure their own financial futures without any help. More workplaces are offering financial wellness programs and advice from independent advisers. Workers are being saddled with less paperwork and fewer decisions. Retirement plans are automatically signing employees up for 401(k)s, gradually increasing their savings rates, and putting them in target-date funds that give them the right asset allocations for their age.
Once retired, Americans will likely find it easier to plot out their budgets. Policymakers and retirement plan providers are working on ways for workers to convert savings into a stream of "lifetime income” that also makes planning simple. While historically low interest rates mean annuities and longevity insurance are expensive now, they should become a better deal when rates inevitably rise. Reverse mortgages, which earned a deservedly bad reputation in an earlier incarnation, might also help. And new spending and investing models from firms including Morningstar, Inc. and JPMorgan Chase & Co. take a more efficient approach to spending and investing, offering personalized plans that adjust dynamically when market conditions change.
There’s another way to improve the odds you’ll save enough, says Harvard Business School Professor Michael Norton. Instead of thinking about retirement savings as this dreary thing that "will sustain you until you die," he suggests focusing on specific things you’re saving for. How many times a week do you want to eat out when you retire? How about a summer in Paris, or a world tour? Think of your spending in terms of opportunity cost. Forgo new swimsuits this summer, book the savings, and you’re that much closer to adding a pool to your retirement dream house.
Setting those kinds of goals makes saving much more enjoyable. "You're rewarding yourself when you retire," Norton says, "rather than just taking from yourself now." Financial Finesse’s Carter says early retirement is a particularly motivating goal. He insists retiring early is often an eminently achievable goal as long as workers make small, gradual adjustments to savings rates now.
All of this is not to whitewash the challenges of retirement. It’s to point out that there are simple steps to take to make retirement years more relaxing than restless.