Retirement Deficit

Published On: June 17, 2019

Written by: Ben Atwater and Matt Malick

Coming on the heels of our retirement planning email series “Notes On . . .” and as we are about to release our just completed Atwater Malick Whitepaper on Retirement Planning, the World Economic Forum released a report on Thursday that lays bare the awful state of retirement savings across the globe. 

The size of the world’s collective retirement savings deficit might exceed $400 trillion by 2050, up from $70 trillion in 2015.  In the U.S., the savings deficit will be the largest at $137 trillion, followed by China at $119 trillion and India at $85 trillion.

The crux of the study is that retirement account balances aren’t increasing fast enough to cover rising life expectancy and that workers may outlive their savings by a decade or more.

Workers will need to get by on less, delay retirement, work part-time and / or redouble efforts to save. 

According to the report, in the United States, 65-year-olds have enough savings to cover 9.7 years of retirement income. Based on current life expectancies, this means the average American man will run out of money with 8.3 years left to live.  Women, whose life expectancies exceed those of men, are looking at a 10.9-year gap. 

The study assumes retirees will need enough income to cover 70% of their pre-retirement pay, and didn’t include Social Security or other government programs in the calculations. 

The situation is no better in other countries across the world.  From the U.K. to Australia to Canada to the Netherlands, savers face similar and even worse deficits.  While the U.S. faces the aforementioned 8.3-year gap for men and 10.9 for women, this pales in comparison to Japan where men face a 15-year deficit and women are looking at a 20-year deficit. 

The Japanese save similarly to Americans; however, they tend to invest too conservatively.  This results in an outcome where Japanese can only support about 4.5 years of retirement.  Additionally, Japanese life expectancy for women is the highest in the world at 87.1 years, while Japanese men live 81 years. 

This is an astonishing finding.  It goes to a point we’ve made over and over – stock investing is absolutely necessary for most savers.  Further, planning for a long retirement is the wisest course of action.  Our conversations with clients start with a life expectancy for males of 92 years and for females of 94 years, but we are apt to lengthen these based on learning more about family health histories. 

We are also, more and more, testing client projections for long-term care expenses due to extended lifespans.  Determining an asset allocation that is aggressive enough to cover even worst-case retirement expenses, but not so aggressive as to scare investors out of the market during times of turmoil, is an overarching goal. 

The evolution of retirement planning over recent decades stems from increasing reliance on individuals saving for their own retirements as companies and even some public entities have moved from pensions (defined benefit plans) to 401(k)-like vehicles (defined contribution plans). 

It’s now up to workers to save their own funds for retirement.  Every investor’s first line of saving, after a reserve fund, should be maximizing, to the extent possible, contributions to workplace retirement plans.  Very often, workers should invest these plans aggressively because of the consistent dollar-cost-averaging that occurs as employers withhold funds from each paycheck to contribute to the plan. Sticking to an aggressive allocation and an aggressive payroll withholding through all market conditions is vital.  Don’t mess around with your 401(k) – set it and forget it. 

The problem the Japanese (and all of us) are facing is an important lesson for all investors.  Longer life spans mean you must save more than ever, invest more aggressively than ever and plan better than ever.