Most Americans are aware that the US government owes a lot of money – over $14 Trillion and counting – and that the US Budget Deficit is expected to reach a record high this year – about $1.5 Trillion. Unfortunately, many Americans have not heard of another deficit that threatens the future quality of life, standard of living, peace of mind, and dignity of almost every future retiree out there as well as their extended family: the $6.6 Trillion Retirement Income Deficit.
The above figure comes from a recent study commissioned by Retirement USA and conducted by the respected non-partisan Center for Retirement Research at Boston College. In its simplest terms, the Retirement Income Deficit is defined as the difference “between the pensions and retirement savings that American households have today and what they should have today to maintain their standard of living.”
This is certainly grim news for most Americans, and though the amount of the deficit seems astronomical, the actual deficit may actually be higher than estimated for several reasons. One reason is that the estimate assumes people will continue to work, save, and accumulate additional pension and Social Security benefits until they retire at age 65. With many people retiring well before they turn 65, the amount of retirement savings they would actually accumulate would be less than the figure assumed in the study. This means that the income shortfall would be higher than estimated.
Another assumption the study makes is that retirees will spend down all their wealth in retirement, including all of the equity they have in their homes. In reality, not everyone will convert their entire savings into annuities, nor would everyone enter into a reverse mortgage in order to annuitize their equity in their homes. Consequently, the income shortfall would be greater than estimated. Other expenditures not figured into the study are potential out of pocket medical and long term care expenses that retirees may incur as they age. Last year, it was estimated that the cost (national average) of a private room nursing home was over $70,000 a year. These, no doubt, would compound the income shortfall.
Even if the Retirement Income Deficit were only $6.6 Trillion, it is hard to see, and unrealistic to expect that government would make up for this deficit in its entirety by increasing social security benefits. Already, the government has announced that the Social Security Administration would incur a deficit of $45 Billion this year, with the total reaching $600 Billion over the next 10 years. Consequently, congress is already exploring making changes to our social security system such as raising taxes, reducing benefits, or both.
It is also difficult to imagine that the corporate sector would come to our rescue. Do you think that corporations would change course and start providing more traditional pensions or defined benefit plans? Alternatively, would they suddenly feel more altruistic and increase their matching contributions to 401(k)s or other defined contribution plans?
At the end of the day, this burden of this $6.6 Trillion Retirement Income Deficit will fall squarely upon the shoulders of every future retiree out there, and to some extent, their extended family. Future retirees would either have to retire with a much lower quality of life and standard of living than they had previously imagined, continue to work either part time or full time into their retirement years to support themselves, or have to significantly increase their current retirement savings in order to ensure that they can still retire with the kind of lifestyle they would like to have.
This is a new reality. And if we are aware of it, accept it, and act on it by assuming responsibility for our own retirement, there is every reason to believe that we will be able to have the financial peace of mind we all deserve during our golden years.
David Ramos has over 20 years of experience in banking and financial services. David has a Finance MBA from UCLA, and an AB in Economics. You can obtain more information about personal finance matters and planning for your retirement through his website at http://howcaniretireearly.com/