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.
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.
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!