On the right track for retirement? Our experts weigh in on how to make sure you are saving enough to retire.
Saving for retirement. The thought of it brings about equal measures of relaxation and anxiety… Will you have enough money to live the life you want, or will you be supplementing your social security with part-time jobs until you’re 100?
According to the Federal Reserve’s most recent Economic Well-Being of U.S. Households Report, 60% of Americans are not sure if they’re on track for retirement, and the average American has just $65,000 set away for their retirement years. And it’s not enough. With the old pension system essentially done away with, social security’s funding longevity in question, people living longer, and middle-class wages not keeping pace with inflation, it’s nearly impossible for most people to save enough money to get them through retirement. Much like the healthcare system, the retirement system is broken.
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Economist Ben Harris has some ideas on how to improve it. (You can hear more of his insight on saving for retirement on the HerMoney Podcast!) Harris recently served as the Assistant Secretary for Economic Policy and the Chief Economist with the U.S. Treasury Department. He also co-authored a book with economist Martin Bailey called The Retirement Challenge: What’s Wrong with America’s System and a Sensible Way to Fix It.
What’s Right with Our Retirement System
It’s not all gloom and doom, Harris says. There are positives. “The first thing that’s right with this system is that it allows us to accumulate enormous sums of money,” he says. “At the end of 2022, if you look across different retirement accounts, Americans had roughly $33 trillion in these various accounts, roughly a doubling from 2010. So, we have a lot of money socked away for retirement.”
The second thing that’s good about the system is that it’s flexible. “A lot of people want to work until they’re older, they see value in it,” Harris says. “Some people want to retire as quickly as they can. Marital situations are different, people have different preferences. People have different expectations for how long they’ll live. Some want to leave money to kids, some don’t.”
The third positive is that we put a lot of support through public programs: Social Security, Medicare, Medicaid. Just look at the nation’s budget. “As a country,” he says, “we’ve decided that retirement is really important. And we’re going to put incredible resources towards it. So that’s what’s right with the system.”
What’s Wrong with Our Retirement System?
“One thing that’s wrong with the system,” Harris says, “is it simply fails certain people.” Economists, he adds, don’t like to make moral judgments,” but I think that someone who has worked their whole life and made the right decisions should not be living in poverty when they’re older.”
Poverty is a serious problem for women in retirement — especially women who aren’t married and women of color. “We see really high poverty rates, for example, for Hispanic women who are single when they’re older.”
Part of the problem, he says, is that the 401(k) system is out-of-date, and it’s a system that came about by accident, not choice. “It was not like policymakers ever sat down and said, ‘Yeah, we want a system of 401(k)s.” It was a small part of the tax code,” he says, “they became really popular over time, and companies shifted away from traditional pensions, towards 401(k)s, in part, because they didn’t want to take on the risk of having to fund pensions.”
So now, Harris says, we have a system where a lot of people have money in 401(k)s, but that doesn’t necessarily equate to security. Because 401(k)s are invested in the stock market (and they’re not an insurance product, like an annuity) they can go down — and at the wrong time… Ask anyone who considered retirement in 2008 or 2020. Also, while your investment in real estate is a wonderful thing, your home can’t be considered a liquid asset, because you need a place to live “Maybe you’re a person who’s been a middle-income worker for your whole life,” Harris says, “and you’ve got half a million dollars socked away. Maybe you don’t have a mortgage. On paper, you’ve got a lot of wealth, right? you’ve got half a million dollars in your 401(k), maybe you live in a half-a-million-dollar house. But we don’t have great mechanisms for turning all that wealth into security. And that’s a real fundamental problem with our system.”
For women, the problem is even greater because they tend to live longer than men, “and we don’t do a good job of dealing with the risk of unknown lifespans. If everyone knew how long you would live,” Harris continues, “you could take whatever resources you had and budget accordingly.”
So, What Can Be Done to Improve the System?
Harris believes there are a lot of things that policymakers can do. “Now, policy is really not set up well to help all people accumulate savings,” he says. To give one example, there are massive tax base incentives to saving in a 401(k), but upper income people tend to benefit more from the incentives than middle income workers. “One thing that policymakers can do is make the retirement saving incentives more equitable,” he says. Employers also play a real role in this — or at least they should. “I think employers have become, whether they like it or not, one of the vehicles through which we save,” Harris says. “The first thing that employers can do is put people automatically on a path towards sound saving; having accounts where you’re automatically withdrawn.”
Economists have been thinking about how to get people to save more for a long time, and they’ve found that the biggest problem is inertia — people just continuing to do what they’ve always done. So, if you haven’t been saving for retirement, you’re not likely to start without some sort of motivation or catalyst. “But if people are automatically put on the path to good saving, they tend to do it by leaps and bounds more than if you ask them to actively save.”
But households also need to do their share. “If you’re getting any sort of 401(k) match, and you’re leaving it on the table, that’s a big mistake.” Here’s how to get started. And if your employer doesn’t offer a 401(k), no worries — you can start saving on your own via an IRA.
And, easier said than done, “people need to be vigilant against bad decisions when it comes to investing. Economists have this mantra: diversification, low rates,” Harris says. (And don’t be intimidated by the word — diversification is easy!)
“The other thing that people can do,” he says, “is to think about their retirement in terms of income, not just wealth, and stress-test their retirement. There’s a decent chance they’re going to live into their mid-90s. In fact, if you’re a 65-year-old woman, you have a 13% chance of living at least three more decades.”
It’s Complicated – Feel Free to Ask Questions
In writing his book, Harris had to write a chapter on annuities and found it daunting. “I’m a PhD economist,” he says. “I should be able to describe how annuities work. It was just so complicated. And that’s just one tiny, little sliver of this whole system.”
“When I worked at Brookings Institution, I had a bunch of research assistants. And these were young people who are going to go on to get PhDs at Ivy League schools, just the smartest people you’ll ever meet. And one day, they all came to my office. They looked a little sheepish. And they said, Ben, we want to set up a retirement account. We don’t know how.”
“These people can run circles around anyone,” he adds. “When it comes to math, they understand the value of compound interest. But they didn’t know how to physically go on to their computer and set up a retirement account.”
In other words, if you’re not sure where to start, don’t be embarrassed! We all have to learn sometime… and it’s never too late to prioritize your financial future. You got this.
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