The idea of a safe and secure retirement for millions of Americans is starting to fade away slowly. According to recent research, there is an increase in the financial gap between the actual cost of living and what retirees actually have and this has shown no signs of improvement.
The Growing Gap Between Needs and Reality
According to a recent study conducted by the LendingTree, retirees in the largest 100 U.S. metro areas need approximately $71,400 per year before taxes just to cover the cost of basic needs. However, the average Social Security income in these same areas equates to only $21,500. This simply means that retirees are able to cover only about 30% of their expenses solely with Social Security.
“For many, [retirement] will never happen” said Matt Schulz, chief consumer finance analyst at LendingTree. “Most aren’t fortunate enough to have a seven-figure nest egg or a pension to lean on.”
Retirement Delayed—Or Denied
Additionally, another survey was conducted by D.A. Davidson and this included a sample size of over 1,000 adults aged 50 and older. The results from this survey concluded that 41% of respondents don’t believe they’ll be able to afford the kind of retirement they once dreamt of.
According to a 2023 Pew Research Centre report, approximately 1 in 5 Americans aged 65 or older were still working. This rate is nearly double the rate seen in the 1980s. Many people do not delay retirement by choice, but rather because they need to work harder to afford it.
From Pensions to Personal Responsibility
Experts believe that the impact of this is a major change in retirement planning over the past few years, and that is the reduction of traditional pensions and the increase of self-funded plans such 401(k)s.
“Moving from pensions to 401(k)s is like handing someone the keys to a car without teaching them how to drive,” said Bill Harris, founder of Personal Capital and former CEO of TurboTax.
Marcus Sturdivant Sr., a senior adviser at The ABC Squared, noted that generational differences have also played a role. “This is the generation that had pensions or employee-sponsored retirements, which were the burden of the company to fulfil,” he said. “Now the focus is on the individual to save…and the advice from already retired parents didn’t translate to this new system.”
A Culture of Instant Gratification
Apart from the structural changes, cultural way of life has also added to the problem. Sturdivant believes that many Americans have been trapped by a mindset of instant gratification, choosing short-term pleasure over long-term planning.
“We lost perspective of short-term sacrifice for long-term gains; instant gratification is winning”, he said.
Can Social Security Close the Gap?
As their savings start to decrease, more and more Americans are starting to depend on Social Security as their primary source of income. However, experts warn that this program was never meant to carry the entire weight of retirement.
“Social Security was not designed to cover your entire retirement but to supplement it,” said Sturdivant. Yet, nearly 39% of retirees now depend entirely on their Social Security checks.
Chad Harmer, founder of Harmer Wealth Management, agrees that benefits should be increased, however there should be structural. “Higher benefits without a funding fix accelerate the trust fund’s shortfall,” he noted. Harmer recommends a modest payroll tax increase and lifting the wage cap to strengthen the system.
He also warns that simply increasing payouts won’t be enough.
The Path Forward
As the cost of living increases in terms of healthcare, life expectancy increases and retirement savings being insufficient, there are many Americans who will need to work past their retirement age. Bill Harris emphasizes that healthcare inflation alone is way above the general cost-of-living increases, and this makes the problem worse.
However, future generations must start planning from now and saving consistently to prepare for retirement.