Fake News

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100 Million Americans Have no Retirement Savings!

Posted on by David
Millions of Americans retirement savings are dangerously low

Recently, while complaining about rich people using IRA’s, Senator Ron Wyden said that 100 million Americans have no retirement savings. You mean 1/3 of Americans have no money saved for retirement? Oh Noes!

This is a startling statement meant to be an eye-catching headline. It may even be true, but let’s look further into this statement before we make our minds up. Like I said in my post on whether 40% of Americans Don’t have $400 in the Bank, “There are three kinds of lies: lies, d***** lies, and statistics.” I’m sure you’ve seen studies that show that the average American only has several thousand dollars saved for retirement. While it’s true that most people aren’t pursuing FIRE, I don’t believe we have an impending retirement crisis on our hands.

First off let’s look at the 100 million Americans figure. 100 million people represents almost 1/3 of America. But if you look at the population of America by age and sex, you’ll see that the number of Americans under 25 equal 103.26 million.

100 million Americans have no retirement savings, but that is because they are children...
Source: Statista

So right there you can see that there is an issue with the “100 million Americans” figure. Very few people under 25 even have a job much less a job with a 401(k). And at 25 very few “adults” are worried about saving for the future (even if they ought to be). If they are looking towards the future at all, most of them are looking to pay off student loans or save to buy their first house than actually save for retirement.

According to Vanguard, the average 401(k) balance for people 25 and younger is $6,718. Knowing this it makes sense that 100 million Americans have no retirement savings, but that doesn’t necessarily mean it’s concerning.

Why don’t older people have more in their 401(k)?

The 401(k) started as part of the Tax Revenue Act of 1978. It was mostly an accident and it took tax lawyers a couple years to notice it as a tax loophole. It wasn’t until 1981 when the IRS issued new rules that allowed employees to fund their 401(k) through payroll deductions. After a couple years most big companies offered 401(k) plans. This means that someone who is currently 65 had been working for roughly 7 years before the 401(k) had become a thing that was available to them.

That easily explains why 401(k) balances of people over 65 aren’t proportionally higher than those of younger savers. They didn’t have them available when they started their careers. They had pensions. The 55-64 year-old crowd also likely had pensions. The 401(k) is a relatively newer retirement tool. And even now that 401(k) plans are more popular than pensions, many people still have pensions. Most teachers, contractors, and government workers still have access to pensions. So they have to be accounted for these kinds of surveys.

How many retirement accounts do you have?

Another issue with surveying the average balance in a retirement account is that it ignores the fact that most people have more than one retirement account. A family with two working parents can easily have several retirement accounts even though the family is saving for retirement together. If each parent has both an IRA and a 401(k), that’s 4 retirement accounts. And if each parents has both a traditional and a Roth IRA that can make 6 accounts. And that’s only if both parents only have one 401(k) each.

Over the 1994-2014 period, 25 million 401(k) holders separated from an employer and left at least one account behind and several millions of those holders left two or more 401(k)’s behind. According to the Social Security Administration (SSA), in 2013 over 33 million individuals could have potential benefits from past retirement accounts. Source: https://www.gao.gov/assets/gao-15-73.pdf

“The considerable mobility of U.S. workers increases the likelihood that many will participate in multiple 401(k) plans. Over the last 10 years, 25 million participants in workplace plans separated from an employer and left at least one account behind and millions left two or more behind. When individuals hold multiple jobs, they may participate in many 401(k) plans or other types of employer-sponsored plans and upon changing jobs face recurring decisions about what to do with their plan savings.”

Government Accountability Office

It’s not hard to have several accounts

If you leave your job, you can opt to either withdraw your 401(k), roll over the money into another retirement account, or leave the money in your old employer’s custodial care. Below is a graphic depicting how a worker could accumulate several retirement accounts. A couple years after starting his first job, he leaves for a new one. Instead of rolling his 401(k) into an IRA, he leaves it with his old employer to manage. His employer then places it into a forced-transfer IRA, An IRA for previously terminated employees. After leaving his second job he rolls over that 401(k) into an IRA. When he leaves his third job he leaves the 401(k) with his old employer to manage. And he starts his fourth job and opens up a 401(k) with them.

The average retirement account by definition is average rather than cumulative.
This worker’s average retirement account is only $4,250 rather than $17,000

So by the time he is onto his fourth job, this hypothetical worker has 4 retirement accounts totaling $17,000. Though his retirement savings total $17,000, the average amount in his retirement accounts only equal $4,250. Using this example you can see how someone saying “the average retirement account only has X amount of money in it.” That may be true, but the average American may have more than one retirement account.

According to indeed the average employee stays at their job for just over four years. If that’s true and they don’t get around to rolling over their 401(k) into their new employer’s 401(k) or an IRA, the average worker could have 10 to 12 different retirement account by the time they retire.

Conclusion

As you see these kinds of charts and statistics can be misleading. Who are they counting in their surveys? Are they counting all Americans, or only working Americans? What types of retirement accounts are they factoring in? Is it all kinds of retirements accounts, or just certain ones? Are they accounting for pension plans? Just like with everything you read or hear, a little critical thinking goes a long way. Is the average American not saving enough for retirement? Yes, I believe everyone could benefit from a little more discipline when it comes to delayed gratification. But is the future all doom and gloom? I don’t think so.

What do you think? Are we headed towards a retirement crisis, or is it all fake news? Let us know in the comments below!

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Is it True that 40% of Americans Don’t have $400 in the Bank?

Posted on by David

You’ve all heard the statistic that 40% of Americans don’t have $400 for an emergency. That seems pretty dire! $400 is not that much money in the grand scheme of things. In many cases $400 would not cover rent, a maintenance bill, or even groceries for the month. If this statistic is to be believed, this leaves over 130 million Americans just one step away from financial ruin. So where did this 40% figure come from and is it true?

Page 21 of the Report on the Economic Well-Being of U.S. Households in 2017 starts off by saying “Four in 10 adults in 2017 would either borrow, sell something, or not be able pay if faced with a $400 emergency expense.” News outlets and politicians have run with this to say that 40% of Americans don’t even have $400 in the bank. It makes for a pretty catchy headline and newspapers exist to be sold. But you know what they say, “There are three kinds of lies: lies, d***** lies, and statistics.”

“There are three kinds of lies: lies, d***** lies, and statistics.”

Anonymous

There are problems with all statistics, which is why the methodology must be published alongside the survey. This is also why there are entire classes devoted to statistical bias. In this case, the survey was about how the respondents would choose to pay a $400 emergency expense, and they were allowed to pick more than one answer. The actual responses add up to more than 100%.

The actual data can be seen here.

Question EF3

Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense? If you would use more than one method to cover this expense, please select all that apply.

143% answered so it's can't be true that 40% of Americans Don’t have $400 in the bank.

The total adds up to 143% so obviously this data is flawed. The 40% number is taken from the adding all of the responses that weren’t “Put it on my credit card and pay it off in full at the next statement” or “With the money currently in my checking/savings account or with cash”. These answers together comes in at 59%. 59% divided by 143% comes out to about 41%.

So the math works out, but does it make sense? What if one participant surveyed responded with “With the money currently in my checking/savings account or with cash” and another marked all of the responses? They would both be able to pay a $400 bill with cash, but the “percent of respondents who would either borrow, sell something, or not be able pay if faced with a $400 emergency expense” would be 7/10 or 70%. See how disingenuous that is?

A better gauge of the American financial situation might be seen in question EF5.

Question EF5A. Which best describes your ability to pay all of your bills in full this month? 78% responded with “Able to pay all of bills”.

Question EF5B. How would a $400 emergency expense that you had to pay impact your ability to pay your other bills this month? 85% responded with “Would still be able to pay all bills”.

Why would more people be able to pay all of their bills after a $400 emergency than before? This just adds to my suspicion that the 40% number is flawed. It’s possible that Question EF5B is only asked of the 78% who affirmatively in part A, but the report does not say that.

This report was cited later that year in a study by Neil Bhutta and Lisa Dettling, which found that 76% of families have at least $400 in liquid savings, and 40% have at least 3 months of expenses saved up. This directly contradicts the commonly quoted 40% number.

The original question was asking how the respondent would pay a $400 emergency expense, not whether they had the cash to pay it. While the answers are probably correlated with general financial health, there are plenty of reasons why someone who had the money would choose not to pay for an unexpected bill in cash. This survey isn’t saying that 40% of Americans don’t have $400 to pay for an emergency.

How bad are the typical family’s finances?

America’s finances are not great, that’s definitely true. For example the average household has $6,270 in credit card debt. That’s a shocking amount considering the average interest rate on credit cards is 18%. But it’s not all bad news, 47% of respondents in this study said they have never carried an unpaid balance on their credit cards. Almost half of Americans have never had credit card debt!

The FIRE movement has gained considerable traction in the last few years, and between that and the pandemic Americans’ personal savings rates have shot up. The average savings rate for 2020 was 16% and the high in April 2020 was 33.7%! That’s almost 5 times as much as the ~7% it had been at for the previous 5 years.

The highest savings rate in 2020 was 33.7%! Most Americans now have $400 in savings.
Savings rates of Americans since 2015

If the personal savings rate stayed at 16% everyone could afford to retire early assuming they invested those savings. So I think that while Americans in general are bad at delayed gratification and that clearly manifests itself in their financial situation, the actual truth is much brighter than we’re being led to believe.

Furthermore when looking at the Economic Well-Being survey from 2019 (two years later), the percentage of people who could pay cash for a $400 pop-up expense has actually increased by 28% over the last 7 years. That’s good news! Americans are getting better financially! But good news doesn’t sell headlines, so you’re probably going to keep seeing doom and gloom. At least now you’re prepared.

Now you know.
Knowing is half the battle – G. I. JOE

What do you think? Is the typical American drowning in debt or is the mainstream media more interested in clicks than truth? Let us know in the comments below!