John Dealbreuin, Wealth of Geeks
The 2023 Employee Benefit Research Institute (EBRI) survey shows a decline in Americans’ confidence regarding their ability to live comfortably in retirement. The last time a drop of this magnitude in confidence was observed was during the 2008 global financial crisis. Approximately 80% of workers expressed apprehension regarding the potential for a recession within the following year. About 90% of respondents said they are concerned regarding the persistence of high inflation.
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Inflation’s shadow
The EBRI Retirement Confidence Survey shows inflation is weighing on the minds of Americans, with a significant majority of workers (84%) and retirees (67%) expressing concern regarding the rising cost of living, making it harder for them to save money.
About 75% of employees worried about their salaries keeping pace with inflationary pressures, while 50% of retirees note that their overall expenditures exceed initial projections.
Household budgets are also under pressure, with 73% of workers and 58% of retirees anticipating making substantial spending cuts in response to inflation.
A recent Gallup Poll shows that 60% of Americans are worried about inflation and the economy. In 2022 and 2023, inflation and the economy have emerged as the primary concerns due to the unprecedented surge in prices to a level not seen in the past four decades.
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Retirement savings impacted
The decrease in retirement account balances is a concern as Americans prepare for retirement. About 40% of workers and 58% of retirees indicate retirement account balances have decreased over the past 12 months.
Increased volatility in stock market investments has resulted in 74% of workers opting for more conservative investments in their workplace retirement plans.
Paul Culbreth, CFP, shares an example of his 64-year-old client living in North Carolina who is frequently worried about retirement and whether she has enough money to retire.
He says, “She makes about $148K per year and had $2.3mm in investable assets last year when we completed the plan. With only $80K in annual expenses (inflated at 3%) and assumed growth of her investments at 5%, the plan estimated that her total income-generating assets at age 90 was just under $5mm. Her plan suggests that she had enough to retire with base assumptions, so I recommended reducing the overall risk in her investments as she does not need to take on additional risk. This eased her concerns momentarily.”
Approximately 75% of workers and 66% of retirees prioritize guaranteeing a consistent monthly income for life compared to preserving principal balances.
Unfortunately, 2022 and 2023 are not a typical year for stocks and bonds compared to historical averages. Even conservative-leaning portfolios suffered, with bond investments performing the worst in the last 40 years. The Bloomberg Barclays US Aggregate Bond Index returned -13.01% in 2022.
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Social Security and Medicare concerns
Worker confidence regarding Medicare has also declined, with just half of respondents feeling somewhat confident it will continue to provide benefits of equal value to those received today.
Amanda M. Howerton, CFP, CDFA, advocates building a plan that addresses retiree’s financial goals and incorporates their feelings and values surrounding money. She says, “If peace of mind is a dearly held value, it typically goes hand in hand with not being a burden to others.
“Some specific worries are the cost of healthcare and rising long-term care expenses. For clients concerned explicitly about this, we model these costs in our planning software and talk about whether or not saving and spending habits need to change, or whether or not we need to consider long-term care insurance.”
Moreover, a recent Axios/Ipsos poll shows Americans believe they cannot rely on Social Security to cover their expenses during retirement. About 62% of Americans who are not retired feel that Social Security will cover less than half of their costs. Just 37% of retired people say that Social Security covers less than half of their expenses.
According to the 2022 Social Security Trustees report estimates, retirees in 2034 will receive only 77% of their benefits if Congress does not update the program.
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Delaying retirement
The EBRI survey indicates about 33% of workers anticipate retiring at 70 or later or never retiring.
According to a Transamerica Center for Retirement Studies report, 40% of Generation X workers and nearly half of boomers anticipate retiring after 70 or not retiring at all.
Similarly, Axios/Ipsos’s retirement poll indicates that about 20% of Americans believe they will never retire due to financial worries. Most Americans who have yet to retire (52%) intend to relocate to an area with a lower cost of living upon retirement.
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Retirement planning can help ease concerns
Retirement is one of the most significant transitions in life. Retirees today face higher inflation, economic uncertainty, and political turmoil, in addition to the typical concerns of healthcare costs, living too long, running out of money, maintaining a certain standard of living, and being able to fulfill bucket list items. Unsurprisingly, this transition creates a lot of anxiety about preparedness for people approaching retirement.
The only way to address these concerns with high confidence is to complete a financial plan that measures the likelihood of success by modeling an individual’s income, expenses, growth of investments, debt payoff, and what-if scenarios that keep the potential retiree awake at night.
There is no golden rule for retirement, as too many variables from one person to the next can alter the probability of success. Completing a financial plan will help retirees know where they currently stand based on their goals and current finances and guide them on improving their likelihood of success.
The prospect of retirement is increasingly becoming a source of anxiety among Americans. Economic challenges, rising healthcare costs, and living expenses have led to growing concerns that they may never reach a financially secure retirement. With uncertain Social Security benefits and inadequate savings, the vision of a peaceful retirement seems more like an elusive dream than a reachable reality for many.
