Retirement Saving Crisis is Worse Than We Thought by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 11, 2014
IN THIS ISSUE:
1. October Unemployment Rate Fell to 5.8%
2. Employment For Young People Highest in Six Years
3. Retirement Saving Not Happening For a Third of Middle–Class
4. Just How Little Have They Saved?
5. The Power of the 401(k) Savings Plan
6. The Retirement Saving Big Picture
Each year Wells Fargo & Company conducts a survey of middle-class Americans of various ages to see how they are faring with saving for retirement. The results of the 2014 survey were just made public late last month. I will summarize them for you below. Let me warn you in advance – they are not pretty!
But first, let’s take a look at last Friday’s better than expected October unemployment report. The headline unemployment rate fell to 5.8%, the lowest level in almost six years. So far in 2014, new jobs are being added at the fastest pace since 1999. Best of all, the employment rate for young people ages 25-34 rose to the highest level since late 2008.
To all of our brave men and women who have served in our Armed Forces, we thank you and wish you a Happy Veterans Day!
October Unemployment Rate Fell to 5.8%
Non-farm payroll employment rose by 214,000 jobs in October, nudging the unemployment rate down a notch to 5.8%, the lowest level since July 2008, as many companies added workers to gear up for the holiday season. The economy has now added 200,000 workers or more for nine straight months, a feat last accomplished in 1994.
Economists had expected a seasonally adjusted gain of 243,000 nonfarm jobs, so the report fell short of the consensus. However, so far in 2014 the US has gained an average of 229,000 jobs a month, the fastest pace since 1999. Employment gains for September and August were revised up by a combined 31,000.
Yet despite the acceleration in hiring this year, average hourly wages were little changed. Hourly pay rose only 0.1% in October to $24.57, putting the 12-month increase at 2%., the Labor Department said last Friday. The amount of time people worked each week, however, rose a tick to 34.6 hours and matched a post-recession high.
The labor-force participation rate edged up to 62.8% from 62.7% as more people looked for work. Still, as you can see in the chart above, the labor force participation rate peaked in the late 1990s and has been trending down ever since.
Employment For Young People Highest in Six Years
Among 25 to 34-year olds, the percentage who were employed (the “employment-population ratio”) hit 76.2% in October – the greatest proportion since the end of 2008 – and up from 74.8% a year earlier, according to the Labor Department.
As the employment environment strengthens for young workers, that should improve their chances of buying homes, as well as their appetite for home ownership.
Young workers face a number of major challenges when it comes to homeownership, with their share of residential purchases recently hitting a 27-year low. Young workers have a particularly tough time putting together enough cash for a down payment, especially as they face a growing load of student debt.
Regulators are working to ease the flow of credit, hoping to widen the pool of borrowers. Didn’t we see this movie before in 2007 and 2008?
Retirement Saving Not Happening For a Third of Middle-Class
Saving for retirement is a formidable challenge for many middle-class Americans. Some say we have a full-blown retirement saving crisis in this country. I would agree. For the past five years, Wells Fargo & Company has conducted a nationwide survey on consumer saving patterns.
On behalf of Wells Fargo, national polling firm Harris Interactive conducted 1,001 telephone interviews from July 20 to August 25, 2014 of middle-class Americans between the ages of 25 and 75, with a median household income of $63,000. Here are the numbers:
Among all those surveyed, 34% are not currently contributing anything to a 401(k), an IRA or other retirement savings vehicle, according to the latest Wells Fargo Middle-Class Retirement Study. Some 41% of middle-class Americans between the ages of 50 and 59 are not currently saving for retirement.
Nearly a third of all respondents say they will not have enough money to “survive” on in retirement, and this increases to nearly half of middle-class Americans in their 50s. Over two-thirds of all respondents affirm that saving for retirement is “harder than I anticipated.”
Perhaps the difficulty has caused more than half to say they plan to save “later” for retirement in order to “make up for not saving enough now.” Joe Ready, director of Institutional Retirement and Trust comments:
“Saving for retirement isn’t easy. It requires sacrifice, and it’s not something people can push off and hope to achieve later in life. If people in their 20s, 30s or 40s aren’t saving today, they are losing the benefit of time compounding the value of their money. That growth can’t be made up later, so people have to commit early in life to make savings a regular discipline year after year – it is the only way most people will achieve their financial goals to carry them through retirement.”
For those between the ages of 30 and 49, some 59% say they plan to save later to make up retirement savings, and 27% are not currently contributing savings to a retirement plan.
Some 61% of all middle-class Americans, across all income levels, admit they are not sacrificing “a lot” to save for retirement, whereas 38% say that they are sacrificing to save money for retirement. A staggering 72% of all middle-class Americans say they should have started saving earlier for retirement, up from 65% in 2013.
When respondents were asked if they would cut spending “tomorrow” in certain areas in order to save for retirement, over half said they would: 56% say they would give up treating themselves to indulgences like spa treatments, jewelry or impulse purchases; 55% say they’d cut eating out at restaurants as often; and 51% say they would give up a major purchase like a car, a computer or a home renovation.
Just How Little Have They Saved?
According to this year’s survey, middle-class Americans have saved a median of only $20,000, which is down from 2013. Middle-class Americans across all age groups in the study expect to need a median savings of $250,000 for retirement, but they are currently saving only a median amount of $125 each month.
Respondents between the ages of 30 and 49 are putting away a median amount of $200 each month for retirement, whereas those between the ages of 50 and 59 are putting away a median of only $78 each month for retirement according to the survey. This is counter intuitive! Older people should be putting more, not less, into their retirement savings.
Only 28% of all age groups included in the survey reported that they have a written financial plan for retirement. People with a written plan for retirement are saving a median of $250 per month, far greater than the median $100 per month that is being saved by those without a financial plan.