The good news is that Americans are living longer and spending more years in retirement than ever before. However, funding retirement is a fast approaching crisis. On this week’s WEALTHTRACK we have an exclusive interview with Financial Thought Leader and legendary investment consultant, Charles Ellis, who tackles America’s greatest domestic financial challenge in a new book, “Falling Short: The Coming Retirement Crisis and What To Do About It”.
Charles Ellis Co-Author “Falling Short: The Coming Retirement Crisis and What To Do About It”
CONSUELO MACK: This week on WEALTHTRACK, The crisis is coming! The crisis is coming! Financial Thought Leader Charles Ellis is sounding the alarm about the fast developing retirement crisis with a new book, Falling Short: The Coming Retirement Crisis and What to Do About It. The big problem and how to solve it are next on Consuelo Mack WEALTHTRACK.
Hello and welcome to this special retirement edition of WEALTHTRACK, I’m Consuelo Mack. Retirement is a universal goal, one frequently neglected in our youth, addressed in middle age and, if we are fortunate enough to get there in good physical and financial shape, enjoyed in later years. Funding retirement however is a national challenge and a fast approaching crisis. Americans are living longer and spending more years in retirement than ever before.
According to a recent report on mortality from the centers for disease control, a woman who turned 65 in 2012 can expect to live another 20 and a half years on average to 85 and a half. A 65 year old male in 2012 will live another 17.9 years on average to 82.9. The golden years have never lasted this long, nor been so difficult to finance.
Aside from longevity, many other factors that used to contribute to a secure retirement have changed. Up to thirty years ago about half of the private sector work force had defined benefit pensions for life, managed and guaranteed by companies, as well as health benefits.
Now the vast majority of private sector workers are managing their own retirement funding through defined contribution plans, such as 401ks. And they are doing so much less effectively, saving far less than they need. In addition they are paying an ever increasing portion of their health benefits.
In 2013 the median household approaching retirement with a 401k or IRA had $111,000 in its retirement account. If a retired couple withdraws the widely recommended 4% of that amount a year they receive only $400 a month of inflation adjusted income. Usually their only source of income aside from Social Security.
Unfortunately, Social Security is contributing less to retirees’ income than it has in the past for several reasons, including the phasing in of already legislated budget cuts, increases in Medicare premiums, which are deducted from Social Security benefits and taxation of those benefits. In 1985 Social Security replaced about 40% of the typical workers pre-retirement income. If that worker had a non-working wife the replacement rate jumped to 60%.
It is now estimated that Social Security will replace only 31% of the average worker’s pre-retirement income by 2030. Despite all of these challenges, this week’s Financial Thought Leader guest believes retirement is a solvable crisis on both the individual and societal level.
He is Charles Ellis, a legendary financial consultant, Founder of Greenwich Associates, an international business and investment strategy consulting firm, Business School Professor at both Harvard and Yale, and author of 16 books including the investment classic, Winning the Loser’s Game. He is also the co- author of the recently published Falling Short: The Coming Retirement Crisis and What to Do About It. I began the interview by asking Ellis about the immediacy of the retirement crisis – were we about to see lines of impoverished seniors at soup kitchens?
CHARLES ELLIS: First of all, right now, there’s no crisis visible. There are no lines. There are no screaming headlines. There are a lot of people who just, we’re going to find a way through this, don’t worry about it, and there’s no urgency to do anything about it.