There have been a variety of research studies recently that show the lack of savings that the average American has accumulated for retirement. These studies often focus on the average amount saved rather than the distribution of savings between those who are young and accumulating retirement savings and those who are nearing or in retirement. This has created a lot of questions about American savings habits and just how far behind the average American is when it comes to retirement savings.
A recent study by the Employee Benefit Research Institute (EBRI) attempts to address this question by examining the average IRA balance by age. The results are not surprising, showing that the older the individual the more that they have saved, on average, for retirement. For example, individuals age 25-29 have an average of just $12,537 saved for retirement while individuals age 60-64 have an average of $165,139 saved.
However, as the authors of the study note, the results support the common theme in similar studies, which is that American do not have enough saved to continue their standard of living in retirement.
The lack of retirement account balances likely has three primary causes. The first is the poor returns offered by the stock market since 2000. While many studies report that the long-term rate of the return for the stock market has averaged between 7% and 9% per year, the average rate of return for the US stock market over the past 16 ½ years has been just 2.17% per year. This highlights the differences between long-term average rates of return and short-term term results, which can persist for decades. Investors who funded their retirement assuming historical returns would continue likely fell well short of their rate of return assumptions.
The second factor that has contributed to the lack of American retirement savings is the impact that the Great Recession had on many individual’s finances. The depth of the recession and labor market decline, as well as the long path to the recovery, forced some households to access their retirement accounts to meet daily financial needs. This reduced the amount set aside for retirement, especially in cases where individuals were forced to sell investments at low values during the market downturn.
The third factor is the lack of retirement savings in America. The decline of employer funded pensions in recent decades has put the responsibility of saving for retirement on individual employees. However, Americans have not adjusted their savings to account for this increased need to set money aside for retirement. In fact, if anything, the US savings rate has declined since the days when employer sponsored pensions were commonplace, with Americans opting to spend excess income rather than save it. American debt levels have also increased as Americans borrow on future income to fund spending today. This has created a large gap between savings that is needed to fund retirement needs and the amount that is actually being saved.
While individual American households have no control over stock market returns or the timing and severity of economic cycles, they do control the amount that they save for retirement. Therefore, their focus should be on increasing retirement savings to meet retirement needs.