The investment world is facing its biggest crisis ever, one that will harm millions of Americans if it's not addressed head on, and soon. Such was the warning of Charles Ellis, about the retirement crisis to come, at this week's Morningstar ETF conference in Chicago.
Many haven't saved enough in their 401(k) plans nor will they receive enough in Social Security to live on during their lifetimes, which are growing longer because of improvements in health care. "The demography is undeniable," said Ellis.
The median savings for American investors is $110,000, said Ellis, founder of financial consulting firm Greenwich Associates and co-author of the book "Falling Short: the Coming Retirement Crisis and What to Do About It." That's simply not enough for a retirement that could last 20, 25, 30 years or more. But, said Ellis, the problem can be solved if action is taken soon by employees, employers and the government.
Here's what he recommends:
1. Workers should retire later
The preferable age is 70 — not 62, when retirees can begin to collect Social Security, or 66 or 67, the "full" retirement ages for baby boomers, depending on their birth year.
"Every year you continue working past 62 gets you 8% more in Social Security payments," Ellis said. By age 70, that's equivalent to 76% more in monthly payment than what would be collected at age 62, according to Ellis. "Putting in another 20% of time gets you 76% more in Social Security."
Working longer also means more years to save for retirement at a time when many people can afford to save more because they likely won't be supporting children anymore. Someone earning $60,000 a year, for example, could afford to save 12% of earnings, which after earning a moderate 6% annually would yield an additional $150,000 in retirement funds, Ellis said.
But working longer isn't always easy. Employers often don't want to hire older workers or keep them on the payroll, for a variety of reasons. To that point, Ellis suggested that employees "keep up to date with their skills, learn new skills, think 'young' and understand their choices.'' 2. Employers should adopt automatic enrollment for 401(k) plans.
Ellis recommended that employers use "best practices" for defined contribution plans, automatically enrolling employees from their first day of work but allowing them to opt out if they choose. The automatic enrollment rate should be the same as the employer match, Ellis said, implying that employers should make matching contributions.
