The Savings Race

Jennifer Robinson jokes about it.

"Who knows," she says, "maybe I'll wind up a bag lady" like those she sees on the streets of Manhattan, where she lives and works.

She doesn't really believe that will happen, of course. But the remark reflects a real concern that when the time comes to retire, she may have a tough go of it.

Millions of other working people across America share that feeling, and in many cases, say experts, they have good reason to be uneasy.

As evidence, they point to a mountain of data showing that most people are just not saving enough, that most workers have no pension plan at all on their jobs and that those who do have access to a 401(k), the dominant type of pension today, are often failing—sometimes badly—to build their accounts adequately.

It adds up to what many consider a retirement savings crisis—part of a broader national trend that has seen overall savings rates plunge to all-time lows between 1 and 2 percent of income. In one recent survey, by Thrivent Financial, 36 percent of working adults said they hadn't yet started saving for retirement, while another 16 percent said they'd put aside $10,000 or less.

What this suggests is that unless they sharply increase their saving, many of today's younger workers will have to work well beyond "normal" retirement and may spend their later years struggling to make ends meet or being more dependent on relatives than they'd like.

Shaken by stock market losses, burdened with heavy expenses and seeing the years beginning to speed by, some baby boomers appear especially anxious.

Robinson, 40, a vice president at gabbegroup, a public relations firm, is one of them. Although she makes a salary near six figures and has $90,000 in her retirement account, she feels she needs to do more.

"Life just gets in the way of saving," she says. "I'm living paycheck to paycheck, as many people here in New York do. But I wouldn't trade my life experiences for a full bank account."

When you're single, as she is, she says, "There's a realization that the odds are pretty good there's not going to be anyone else to help care for you, and that really is a wake-up call."

Although it probably doesn't offer much comfort for those feeling the pressure, preparing for retirement is a lot different and probably harder for younger people today than it was for their parents.

For one thing, the age of eligibility for full Social Security benefits is rising, to 67 for Robinson and others born after 1960, and that may force more people to work longer. This change also has the effect of increasing the amount of money people who retire before 67 will need from other sources to maintain their standard of living.

More significant, traditional pensions, which guarantee lifetime monthly income and have provided a solid financial base (along with Social Security) for many millions of Americans, are fading away. Only 20 percent of private-sector employees are covered by them today.

Although many younger workers wonder whether Social Security "will be there" when they retire, most experts have no doubt about it. They point out that without any changes in present law, full benefits can be paid until 2042. Given Social Security's critical importance, they're confident, too, that changes will be made to ensure its future benefits beyond 2042.

As traditional pensions dwindle, they're giving way to 401(k) plans and similar savings programs, such as 403(b) and 457 plans.

Most 401(k) participants like the plans. They like controlling their accounts, being able to borrow against their funds in a pinch and, especially, having the ability to take their money with them when they change jobs.

But the freedom built into these plans comes at a price. It puts the burden of building a nest egg squarely on the individual. And many people are just not meeting the challenge.

For example, a quarter of the people who have access to a 401(k) don't participate; most who do participate put in small amounts and don't manage their investments very well; and 55 percent of participants cash out of their plans when they change jobs.

Cashing out means paying income taxes up front and (if under age 59 1/2) a 10 percent penalty. It usually means, too, that savings have to be rebuilt from scratch, a task not unlike pushing a runaway boulder back uphill.

Why are people having so much difficulty saving?

"I don't think that it's just that we're a spendthrift society," says Alicia Munnell, who heads the Center for Retirement Research at Boston College. "Middle-class wages have not gone up much in real terms, and living a middle-class life is expensive. … People are under enormous pressure."

Many families, Munnell says, save first to buy a house, then to help their children through college, only afterward concentrating on their own retirement.

Munnell, who examined the situation closely in a recent book, Coming Up Short: The Challenge of 401(k) Plans, written with Annika Sundén, believes the problem's serious but that people are resilient.

"People don't fall off a cliff," she says. "That's not how the world works. But instead of being prepared and comfortable, people are going to have to scramble … at a time in their life when they should have some sense of security."

Their task may also be made harder by the direction of the economy. Experts differ, of course, on that subject, but one, Laurence J. Kotlikoff, professor of economics at Boston University, presents a worst-case scenario. He thinks the future will be so bad that "we all need to start saving like crazy."

In a new book written with Scott Burns, The Coming Generational Storm, he predicts government will deal with the costs of the aging population by printing more money, leading to high inflation, interest rates, taxes and unemployment—and reduced benefits.

Robert Ivey Jr., 61, of Glenshaw, Pa., has already had a taste of such instability. In 2000, as Ivey, a computer engineer, neared his 32nd year with the same company, his entire department was eliminated. Since then, he's been able to supplement a modest pension with some part-time work, but for the last nine months he's been unemployed and searching for a full-time job. His wife, Loretta, 56, works as a part-time office assistant, but still, says Ivey, "we're living month to month."

Fortunately, while Ivey was employed he kept increasing his 401(k) contribution. It wasn't easy. "My wife and I," he says, "had many discussions on money for today versus money for tomorrow."

But now that "tomorrow" has arrived for the Iveys, the 401(k), which has reached a healthy level despite stock market losses of about 25 percent, has become valuable insurance. So far, they've not had to tap it. Next year, Ivey plans to begin collecting Social Security.

Based on his experience, Ivey urges others: "Save as much as possible, save every penny that you can, and don't touch it."

Though the advice is sound, 49 percent of workers in a recent survey conducted by Hewitt Associates, a benefits consulting firm, said they didn't think they were saving enough, with another 18 percent just not sure. Because of such poor showings, retirement expert Munnell feels strongly that system changes need to be made in 401(k)s.

"Saving for retirement, for something so far away, can really only be accomplished collectively," she says. Chief among her recommendations is that employees be automatically enrolled in a 401(k) plan. Workers could still opt out but would have to take the initiative to do so.

That simple device—which an estimated 14 percent of companies already use—can be surprisingly effective, Munnell says. In one company where the change was made, 401(k) participation jumped from 49 percent to 86 percent.

Slowly, other 401(k) changes are also being implemented. In one new program, for example, employees ratchet up their savings by pledging to contribute future pay raises to their 401(k) accounts.

One area where experts agree change is needed is in the way people handle their 401(k) investments.

Studies find that most people do a poor job of it, failing, for example, to lower risk by diversifying and almost never rebalancing their portfolio to meet changes in the market or their own situation.

To encourage better management, some federal lawmakers are pushing legislation to protect employers who provide advice to employees. AARP supports making more investment advice available—as long as there is sufficient protection against conflicts of interest.

In the end, though, says Don Blandin, president of the American Savings Education Council, "people need to be proactive and take charge of their future. That means saving and deciding to give up a little bit of lifestyle today to enjoy a more comfortable life tomorrow. It's a decision you'll never regret."