Are Americans saving too much? Is that a trick question?
The difference between what Americans have saved and what they will need in retirement is $6.6 trillion, according to the Center for Retirement Research at Boston College. Less than 60% of workers are saving anything at, the Employee Benefits Research Institute found, and 57% of adults have less than $25,000 in total savings and investments, according to Pew Research. In other words, there is a retirement savings crisis in the U.S.
But as individuals, a good number of us may be putting away more than we’ll need. Economist Lawrence Kotlikoff and a group of scholars have been making this argument for half a decade. They believe common rules of thumb like 75% of pre-retirement income overstate income needs and online calculators steer us to save more than we should at certain stages of life.
Needed replacement income may be as little as 35% of your former salary if you have paid off the mortgage, shed all childcare and employment costs, and no longer need to save, argues Fred Vettese, Chief Actuary at Morneau Shepell, a Canadian consulting firm. Kotlikoff says common wisdom to save early and often fails to recognize the difficulty of doing so while young and burdened with expenses—as compared to the relative ease of putting something away in higher earning years with fewer expenses.
The bigger issue, though, may be that in order to be properly saved we need to map out a life to age 100. Just 14% of boomers and 23% of Millennials will get there. But we must save, er, over save for the possibility. This is among the biggest reasons that the 401(k) plan has failed as a primary retirement savings vehicle. We don’t know how long we are going to live, so we don’t know how much we need to save.
If we could eliminate this unknown, called “longevity risk,” we’d each need to save about 30% less, says Barbara Novick, vice chairman at BlackRock. “If everyone is saving to be 100 you end up with a higher actuarial pool than you need,” she says. That’s because only a handful will actually live that long and draw from the pool.
Individuals cannot fix this issue alone. They must save for the outlier lifespan. Yet insurance companies that expect to exist forever can pool longevity risk among millions of customers, planning to pay benefits to the precise number that live to a ripe old age. If such pooled risk were broadly in place, we could all save less—about 30% less—and have the same level of financial security.
BlackRock is among the large asset managers addressing this aspect of the retirement savings shortfall; it is pioneering fixed lifetime-income annuity insurance products within 401(k) plans. Novick says transferring longevity risk away from individuals is a key element of forestalling “the next big financial crisis” and would put us much closer to our actual savings needs.
So are we saving too much? In some ways, yes. But the big picture remains one of a grossly under saved population, no matter how you cut it.