The Middle Class Retirement Delusion By the Numbers

Most Americans aren't taking retirement seriously.

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Jason Hull
Jason Hull

The need to save for retirement is accompanied by plenty of hints. Ads like ING’s from a few years ago have neighbors toting around large orange numbers, or simply the word “gazillion” to demonstrate what they thought that their retirement numbers needed to be. Popular authors and academics like Lee Eisenberg, author of The Number, discussed what you’d need in retirement, while in-depth research from William Bengen came out with the 4 percent drawdown as well as, more recently, Wade Pfau’s research arguing that even a 4 percent withdrawal rate in retirement might be too risky. There’s no shortage of good information.

Yet, as an October study by Wells Fargo shows, most Americans are woefully unprepared to manage their own retirement. It’s not just that people have been hit by the most recent recession and economic downturn, it’s that many middle-class Americans have a picture in their minds of what will be sufficient to retire that falls far short of what they will actually need.

Let’s look at some of the numbers in detail:

Some 30 percent of Americans say they will need to work into their 80s to be comfortable in retirement.

Where is the delusion? The reality is that many people won’t be physically able to work into their 80s. According to the U.S. Administration on Aging’s Aging Integrated Database (AGID), 22.5 percent of Americans aged 60-84 reported employment disability—they were physically unable to work and receive disability payments because of that disability.

Some 34 percent of Americans think they’ll need less than 50 percent of their retirement income; yet, median household income is approximately $50,000.

Where is the delusion? One-third of middle-class Americans think that they will need $25,000 annually in retirement. For a family of two, since we can assume that the kids will have left the nest by then, this puts them less than $10,000 above the federal poverty line.

Senior couple watching the sunset

Middle-class Americans believe, on average, their retirement healthcare costs will be $47,000.

Where is the delusion? Medicare out-of-pocket costs are expected to be between $240,000 and $430,000 for a 65 year old couple retiring today.

Middle-class Americans say they will need a median of $300,000 to retire. The same respondents said that, to date, they have saved a median of $25,000.

Where is the delusion? The average age of the interviewee was 50 years old—the ages ranged from 25 to 75 in the interview. This means that, assuming a retirement age of 66 years, they have 16 years to save $275,000. If you assume that the stock market goes up 5 percent per year—perhaps not the safest assumption one could make—then to hit that savings number, they need to save $11,070.69 per year, or 22.1 percent of the median income. However, 68 percent of middle-class Americans who have a 401(k) plan contribute 10 percent or less of their income to retirement.

Middle-class Americans think that a median safe withdrawal rate in retirement is 10 percent.

Where is the delusion? Dr. Wade Pfau, CFA, ran historical simulations for retirees from 1926 to 2000 to see how long retirement savings would last at a 10 percent withdrawal rate. Through 2009, only one year group would still have money—those who retired in 1982. Everyone else ran out of money, with their retirement funds lasting between 8 and 25 years. In more than two-thirds of the cases, retirees ran out of money before reaching the average life expectancy. Most financial planners recommend a 4 percent withdrawal rate, and some, like Dr. Pfau, indicate that 4 percent may be too aggressive.

So how can you snap out of these delusions in time to save your retirement? Here are some suggestions:

  • Max out retirement plan contributions. There are real benefits to retirement plans, including employer matching and tax-deferred or tax-free growth of contributions. If it means that you have to cut back on going out to restaurants or not buy that 183” flat screen TV, so be it. You do not want to be a cat food connoisseur when you’re 75.
  • Start now. If you’re not saving for retirement, get started. Build the habit. Budget. Figure out what you need to do to start socking away money for your retirement.
  • Envision your future self. Our limbic systems cause us to discount the pain or pleasure of our future selves in exchange for current pleasure; it’s called hyperbolic discounting. It’s why people say they’ll start the diet tomorrow and never do. One way to combat this tendency is to picture yourself doing something in the future, such as retirement, and actively think to yourself, “This is my family.” Studies show that if we think of our future selves as family, we’re less likely to discount that future self’s needs.
  • Watch fees. Just like inflation, fees and loads are a silent killer. They take away your money thatcould go to work in funding your retirement, and they line the pockets of salespeople and money managers, which is particularly painful given that actively managed funds usually underperform their benchmarks.
  • Get a plan and stick to it. The aforementioned Wells Fargo study says that only 36 percent of Americans have a written plan. Meet with a financial planner (preferably an hourly, fee-only planner—see the previous bullet) to discuss where you want to be in the future and what you have to do in the meantime to get there.
  • As Lewis Carroll said, “If you don’t know where you’re going, any road will get you there.” Unfortunately, many middle-class Americans think that they know where they’re going, but they’re using outdated maps. We need to come to grips with the investments and savings we required to create a secure retirement.

    Jason Hull is a candidate for the CFP(R) Board's certification, is a Series 65 securities license holder, and owns Hull Financial Planning.