Readers of this blog know that the long term savings rate plummeted as Boomers entered the workforce. This presents a huge risk to many households’ ability to retire comfortably. But with the pandemic came a gusher of money into the pockets of Americans. Initially, this led to a big jump in the savings rate. Have Americans continued to save, or is the savings rate tanking again?
Findings
Regrettably…yes: The savings rates has dropped back down to 8%, a pre-pandemic rate. In January of 2022 it dropped even further, to 6.4%.
Spending is the highest…ever: In the fourth quarter of 2021, American households spent $4.1 trillion.This is a new record. It’s driven most by jumps in spending on cars, food, housing, and health care.
The pandemic “slowdown” lasted only one quarter: The popular perception is that for much of the past two years we’ve been holding off on spending. The reality is that once the first stimulus check hit our pocketbooks, we immediately did what the government wanted us to do. Spend.
Implications
There’s plenty of analysis showing that a 7% savings rate isn’t high enough to provide adequate funding for many households’ retirement goals. The one small bright spot in this data is that with income also higher than ever, the absolute dollar amount of savings is larger than before the pandemic. It’s not that much more, though. As a result, the issue is that once again our culture of consumption means that we are giving up future comfort in return for current retail therapy.
Certainly every client has a different situation. That said, it’s quite likely that most banking and brokerage clients are not saving as much as they should and would benefit from any counsel that drives them in this direction.
This data is from the Bureau of Economic Analysis. I’ve used actuals, not inflation adjusted numbers. This doesn’t change any conclusion – up until the last couple months inflation has been quite low.
In 1978 legislation was passed that enabled 401(k) plans. Since then they have become popular with private companies as a way to shift the retirement savings burden away from the employers and onto their employees. This means a shift to 401(k) defined contribution plans from defined benefit plans (pensions). How dramatic is this shift, and how are the employees behaving?
Findings
Half of private sector employees aren’t participating in any retirement plan: They don’t yet have money in a pension or a 401(k) plan, either because they choose not to participate or because they haven’t worked at a company that offers one.
Huge shift from pension to 401(k): Today, only 11% of employees participate in a pension plan. Most of these employees also have a 401(k). This suggests that the pension is a legacy from a less recent employer and probably won’t pay a significant retirement benefit.
Participants are investing too conservatively: A Wells Fargo study showed that almost 60% of participants are investing to minimize loss, vs. seeking enough growth to retire successfully. Pension managers follow analytic investment strategies to grow the portfolio, but 401(k) participants — who often know little about investing – are likely to take too little risk. This then puts their retirement at risk.
Job changers cash out their 401(k): A Hewitt study showed that over 40% of the time, someone leaving an employer takes a cash distribution from their 401(k), instead of leaving it in or rolling it over into an IRA. While companies often force this for those with very low balances, ¼ of those with a balance of $30-50k are cashing out too.
Implications
This sounds like an SOS for plan participants. For 40 years the burden of preparing for retirement has shifted to the employee, and they’re not behaving well. Changes in the 401(k) system have encouraged more participation, but can’t force people to invest intelligently or to keep their money invested in a tax-advantaged plan – vs. pulling it out to buy a car. Platitudes about investor education seem meaningless when that education has been going on for decades and clearly failing. The options seem to be:
Force investors to invest more responsibly – which is really a return in the direction of pensions and Social Security
Accept people will make mistakes and let them, or…
Seek a third path of culture change, perhaps tied to behavioral finance. More to come on this.
And – let’s not forget that nearly half of private sector employees have no retirement plan, neither 401(k) nor pension. You can’t shift to a 401(k) if you never had a retirement plan. This post isn’t focused on how to get people to participate – or more employers to offer plans. However, if almost 50 million workers aren’t saving for retirement, the long-term implications for them, and for the government safety net, are huge. More to come on this in subsequent posts.
The percent participation data comes from EBRI, and the most recent data available is 2017. However, more recent data is highly unlikely to change the trend or the conclusions. The data on percent of investors cashing out is from Hewitt. The most recent releases in 2009 and 2010 were the data I used here; however in 2017 their research director confirmedthat the overall statistic of the percent of departing employees cashing out was the same as in 2009.
Americans are bad at saving money. Since the last Boomer turned 21, the savings rate has plummeted. As the government floods bank accounts with COVID-related stimulus checks, will we change our spots and start saving more? Or is forced savings the only way to get us to put money aside?
Findings
We save a bunch in three big savings programs: Social Security, pensions, and defined contribution (mostly 401(k) plans) get close to $2 trillion of inflows a year, including both employer and employee contributions.
Two of these programs are forced: Employees don’t have a choice with Social Security or pensions – it’s done for them.
The other is often “forced” and/or “bribed”: Employees are often automatically opted in to 401(k) participation, and often “bribed” with large employer matching contributions to encourage increased participation.
Savings from these programs dwarfs other savings: The total personal savings amount in 2017, for comparison, was $1.2 trillion. That includes much of the contributions to these “forced” plans. Understanding the government definition of savings is quite complex. However, most of Americans’ savings, including their retirement savings, comes from these three forced plans.
What about IRAs?: Aren’t these a way that people save on their own? Yes, it’s the single largest category of retirement savings (chart below). But – most of the IRA assets are actually rollovers from 401(k)s. In 2017, 84% of traditional IRA “contributions” were rollovers. Those assets were usually originally saved in a defined contribution plan.
Implications
As Horace Greeley put it in 1867, “We are energetic, we are audacious, we are confident in our own capacities and in our national destiny, but we are not a systematic, a frugal, economical people”.
All three of the highly successful programs that drive savings in this country, work because they are automatic. Even a 401(k) is now structured to make it hard for employees to not use it. Yet…despite decades of financial services companies trying to educate customers, pursue behavioral finance motivational techniques, and encourage savings, it’s not working. The only significant new savings for most Americans is their forced retirement plans.
From a policy perspective, governments may choose to double down on these forced savings plans. However many financial services companies will resist this approach – either because they believe in the private sector as a superior solution, or because they want to acquire and manage the assets. Suffice it to say that a new approach will be needed to drive Americans to save more. Future perspectives in this blog will continue to explore innovation in this area.
There’s no one easy source for this data, and the most recent that’s easily available across the programs is from 2017. Social Security data comes from their website. Defined contribution and private pensions comes from the Department of Labor. Government pensions comes from federal data and state summaries. Assets in retirement plans and percent rollover contributions comes from the ICI.
Why can’t Americans save? How much do our life delays affect our ability to succeed in retirement? Past posts show the changing demographics of the traditional American two-child family: Getting married later, waiting longer to have kids, but – retiring at the same age. When combined with people living longer, what does this mean for the average family’s success in saving for retirement?
Married with children is the most common type of household in America, so we’ll look at statistics for that family in 1970 vs. today.
Findings
Families are starting much later in life: Compared to 1970, couples are getting married on average 7 years later, and having their first child 8 years later.
The children are launching not long before the parents retire: If the family has two children, the second one will graduate college when Mom is 54 years old. (See my post on marriage and children). This is 8 years later than the 1970 family. In this analysis I’m ignoring the impact of boomerang children. They can keep costing their parents money even into the parents’ retirement!
The age of retirement hasn’t changed: It’s still 65 on average, the same as in 1970. While it did drop a bit in the 80’s and 90’s, it’s back up to 65.
We’re living longer. If you make it to age 65, on average you will live to 85, or 20 years in retirement. In 1970 the average time in retirement was only 15 years.
The “prime” savings years are dramatically compressed. The point at which the kids move out on their own is also a time when the parents are at their earnings peak. If children are moving out 10 years later in their parents’ lives, that means a lot less time for the parents to be saving money free of the encumbrance of paying for their children.
Implications
The recent years haven’t been setting us up for savings success. Having less time to save for a longer retirement is a troubling situation for an American family. Why can’t Americans save? New families, starting later, saddled with student debt, and having a harder time launching (boomerang kids), means it’s harder to save. Add onto this the kids being around (expensively) later in life, this means that by the time families can focus on saving money, it’s almost time to retire.
This issue points out the importance not only of more focused savings earlier in life, but also more carefully managing expenses on children and expenses in general. What are the tradeoffs and how have Americans done at this? Our next posts will suggest not well, and that we need to find new paths to help Americans succeed.
The small print
This analysis requires some simplifying assumptions. It’s important to understand them – but none of them risk changing the conclusion in understanding why Americans can’t save.
Marriage age is the age of first marriage for women taken from the US Census. For men the age is about two years later. Women marry younger. I’ve used the women’s age because it can be compared to the time between first marriage and first birth, older CDC data here.
The data on when/if children graduate college is messy. I’ve simplified by simply using the rough estimate from various sources that the second child arrives about 2 years after the first, and then adding 21 years to get to graduation date.
Retirement age is for men, from work by Alicia Munnell. That age did drop in the 80’s and 90’s. (see Alicia’s article for the various reasons) In recent years the age rebounded back to 65. I’ve used the age for men because the data for women is hard to interpret. Because so many more women are in the workforce, and later, today than in 1970, the retirement age has gone up dramatically in that time. Because that’s largely a function of more women working, the data doesn’t represent real retirement trends. Hence I’ve used men’s retirement age.
Life expectancy here is how long you’re expected to live if you reach 65. Most data you see reported are life expectancy at birth. This is lower than if you’ve already been around 65 years! Americans’ life expectancy after 65 is their retirement duration. Here, I’ve taken an average of men and women, again for simplicity.
Americans are living longer. Given this, how long is retirement for the average American? How will this affect their need for retirement savings?
Findings
Americans are living longer: CDC data shows that from 1970 to 2017, the average life expectancy at birth has risen 9 years for men (to age 76) and 6 years for women (to age 81).
If you make it to 65, you’ll probably make it well into your 80’s: The same data shows that if people who reach age 65 will live about 20 years after that (see chart). Men on average live to 83, and women to 86.
The average retirement age is about the same today as in 1970. For men this is 65 years old. The data for women shows a rising retirement age, but this data is tricky because so many more women are working, it’s hard to compare to historical data. I used Alicia Munnell’s analysis to obtain this data.
The average retirement is about 21 years, 6 years longer than in 1970. This is calculated by comparing retirement age to life expectancy, and is a bit tricky – see the “small print” section for details.
Implications
Ouch! This is a key piece of the puzzle around American’s savings challenge. We know from other posts that we are not saving as much as we used to. At the same time, we need to fund a longer retirement. This is a toxic brew – less savings for a longer retirement.
It is critical to American’s comfortable retirement that we identify ways to help them save more. The next post will look holistically at the combination of demographic changes that are challenging our financial success. Following that, the key will be identifying ways to help Americans save more.
The small print
There are a couple of simplifications I’ve made in order to calculate length of retirement. Men and women have different retirement age averages. However, for women, this is particularly challenging as in 1970 a smaller percent of women worked, by the traditional census definition, and that reduced women’s retirement age average.
We know from the previous post on marriage that women are about 2 years younger than their husbands on average. I use this statistic for heterosexual marriages to apply to retirement as well. If husbands are age 65 at retirement, then their wives are probably 63 years old at that time.
Retirement is a tricky definition. Here, Munnell’s data calculates the age at which fewer than half of men or women are participating in the labor force based on the Current Population Survey. Some other studies look at the age at which people start taking Social Security payments.
The final piece of the calculation is the average retirement length. For men, I use the average retirement age and the average life expectancy at age 65 to calculate this. Life expectancy of 83 years minus retirement age of 65 = 18 years.
For women, I assume they retire the same time as their husband (simplifying assumption). That means they retire at age 63 because they are two years younger than their husband. Then I compare age 63 with the average life expectancy of a woman at age 65 to calculate years in retirement. Life expectancy of 86 years minus retirement age of 63 = 23 years.
Finally, I average the two retirement durations, men and women. Women will live in retirement longer than this number, men will live a shorter time.
In previous posts we’ve looked the dual challenges that Americans spend more and save less. The next series of posts look at why. This first view looks at the marriage and birth age trends that may be postponing the point at which Americans “settle down” and start saving. Are people postponing marriage and having kids?
Findings
Absolutely. Two charts track the marriage and childbirth trends since 1970:
Americans are getting married later: Since 1970, the median age of first marriage for both men and women has climbed about 7 years. It’s now age 30 for men and 28 for women.
Kids come later too: Over the same time period, the mean age of the mother at the birth of her first child has risen 5 ½ years. (see below on why mean is an OK measure here).
Cultural and economic factors drive the marriage “delay”: Some people choose to live together without getting married. This is up from almost no one in 1970, to 10% of 25-34 year olds today. Social attitudes toward the need to marry, and early, have changed substantially. Economically, women say they want to marry employed men. However, among never-married 25-34 year olds, the ratio of employed men to all women has dropped from about 1.1 in 1970 to 0.9 in 2012. In other words, there aren’t enough “qualified” (loaded concept) men available.
Implications
These findings suggest that marriage and birth age trends drivers may be reducing the savings rate. We already know Millennials are “boomeranging” back home due to financial difficulties. Less financial stability probably means less savings than previous generations at that age. Psychologically, pre-marriage Millennials may not take savings as seriously as married couples. Therefore, if they marry and have children later, they are going to be later to the savings party.
This is only the first part of the analysis of demographics on savings rate. Still, already this suggests that working with Millennials on saving early in life may be even more important than with previous generations.
The small print
The marriage data is from the US Census. The childbirth data is from the National Vital Statistics reports. Note that the marriage data is median age, the childbirth data is mean age. The two sources usually report on these different calculations. Analysis of some median vs. mean data for childbirth age shows the numbers aren’t very different and show the same trend so I’ve used the readily available mean childbirth age.
In 1867 Horace Greeley, the famed journalist, observed of Americans: “We are energetic, we are audacious, we are confident in our own capacities and in our national destiny, but we are not a systematic, a frugal, economical people.”
How well he predicted where we are today: a culture that has embraced spending, and abandoned thrift. Perhaps the best long-term indicator of this malaise is the Bureau of Economic Analysis’ calculation of the personal savings rate trend. This is a statistic that is based on disposable personal income vs. expenditures. Data is available back to the early 20thcentury. This gives us over a 100-year window into the trend in how much we save. Will that statistic bear out what Greeley perceived over 150 years ago?
Findings
The answer, perhaps unsurprisingly, is yes.
The personal savings rate has fluctuated dramatically over the past century: Its lowest point was during the great depression when it was negative in 1932 and 1933. People had to dig into savings just to survive. It was dramatically positive – over 25% — during World War II, when the war economy meant everyone was working. On the other hand, you couldn’t buy anything due to rationing!
When boomers grew up, the savings rate dived: During the post-WWII prosperity, the savings rate gradually grew to 13%. But in 1975, after the majority of the Boomers turned 21, the savings rate began a consistent decline. Just before the recession of 2008, the rate was at only 3%.
Some hope based on recent behavior: The savings rate did bump up after the recession, but not to historical levels. It’s still about half of what it was before Boomers entered the workforce.
The BEA summary statistic hides an ugly truth: Here the devil is in the details of the statistic. Disposable personal income includes employer contributions to 401k plans and pensions, because the BEA sees this as a way Americans generate savings – fair enough. But the total amount of “personal savings” in 2019, $1.3 trillion, is less than the employer contributions to retirement accounts of $1.5 trillion. That means that if we look at what Americans actually bring home in their paycheck, they spend it all – and more.
Many Americans admit to not saving anything: Many studies have highlighted that many families can’t or don’t save. A Charles Schwab study found that 59% of Americans live paycheck to paycheck.
Implications
The obvious overarching implication for our country is the one that we’ve been hearing. A lot of families will be in trouble not just in retirement, but also if they have a significant event – e.g. a job loss or an extraordinary expense.
But the big challenge is that this is old news about a stagnant problem! The news media, and financial websites, are rife with a simplistic answer: save more money. This message has been out there for 20 years, but hasn’t worked. We need to drill down deeper in subsequent posts to better understand how to address this trend:
What has changed that drove down savings?
How does this differ by generation?
Why are Americans behaviorally averse to savings?
And most importantly, how can we help people change their behavior to achieve better outcomes?
The small print
The BEA data, including the long-term trend, is central to this analysis. Because the currently available data tables go back only to 1959, the data for earlier in the century is from a previous analysis I did on this topic but I can no longer link back to BEA data as it is no longer available.
The BEA revises their calculation at times, and the most recent revisions’ biggest change was making employer pension contributions accrual vs. cash based. What this really means is that the “income” employers contribute is based on what they should have put in given likely pension benefits, not what they actually put in. So if employers (including the government) aren’t contributing enough, the BEA still includes what they should have contributed in the personal income amount.
I was with a group of a dozen parents recently and the topic that arose was “how much do you charge your children for rent?” Almost half of the parents had adult children living at home. It was a fascinating debate — some charged nothing, others a modest amount, one got market rate. This points to a broader question – how much does it cost parents to have an adult child living at home? And how the cost of boomerang children impacting their retirement?
This post will look at the trend of more children moving back home, and evaluate the financial impact of boomerang kids. I’m not going to address the psychological impact on parents or children when the kids move back in, or how to deal with them – that’s worth several posts on its own!
Findings
Dramatically more adult children are living with their parents. Census data shows that since 1970, this proportion has more than doubled, from 7% of 25-34 year olds to 16%.
They’re not buying homes, as home prices skyrocket: The average home purchase price is up 57% since 2011. An Economist analysis showed that while in 1990, a generation of Boomers with a median age of 35 owned 1/3 of America’s real estate by value, in 2019 a similarly sized cohort of Millennials owned just 4%. The kids may be living at home while they save for a house, but…
Those kids don’t live for free: While it’s hard to quantify the cost of these adult children living at home, their parents may be spending roughly $1,000/month to support them. The table below shows some of the expenses that historically parents didn’t pay for when their children left home, but may be footing the bill for now. Food, utilities, cars, health insurance, cell phones – the cost of boomerang children adds up.
Potential big chunk of parents’ retirement savings: A Synchrony Bank study concluded that families in their 50’s have a median retirement savings of $117,000 (many have none at all). A child at home for 3 years costing over $35,000 would cost a third of retirement savings amount – not small change!
Parents’ incremental monthly cost of boomerang children living at home (details in the small print section below):
Food
$200
Utilities
$100
Cars/insurance/gas
$300
Healthcare – insurance and medical costs
$300
Cell phone
$100
Miscellaneous spending/allowance
$100
TOTAL $1,100
Implications
Boomerang children represent a significant risk to their parents’ financial health. At a time when the parents would normally be downsizing their house, their fleet of cars, and their expenses, they are postponing the reduction and spending on their kids. This doesn’t even count the potential impact of helping the children pay off their student loans, which some parents are doing. Bottom line, many Americans are likely risking their retirement because the kids are still on the payroll.
Because the unemployment rate of late 20’s kids is single digit, most of them should be able to reimburse their parents for living expenses. Yet fewer than half of these boomerang kids contribute anything for rent. Hence parents are paying costs they don’t need to! If you are advising clients on how to manage their finances, a key should be that the parents shouldn’t be too quick to foot the bill for their adult children. The kids can afford it, the parents often can’t, and the psychologists will say it’s healthier for the kids’ development to take on this responsibility.
The small print
The data on kids living at home is for 25-34 year olds, a readily available census category. If we had data for just 25-29 year olds, the percentage at home is likely much higher, perhaps double. The costs of the kids at home are all estimates. Food is a rough number based on what families typically pay for food, and the fact that the kids tend to eat a lot. Utilities assumes the kids are at home using electricity and heat when the parents are away. Cars are a big item. Insurance on a younger male can be $3,000 or more a year, and maintaining an extra car brings a lot of costs. Health costs are based on the incremental expense to add children on a typical corporate plan plus a higher out of pocket maximum for a family.
