Retirement Crisis! Citizens of the world! The press is misleading you on retirement savings!
A worrying new study from the World Economic Forum predicts a retirement crisis with “retirees might run out of money 10 years before they die,” according to Bloomberg News coverage. The World Economic Forum calculates that the average 65-year old American has only enough savings to cover 9.7 years of retirement income out of a nearly 20-year expected retirement. Results for other countries are similar.
As usual, headlines from the credulous news media pile up: “Japanese women face retirement savings gap of almost 20 years,” says the Japan Times. ‘UK citizens will on average outlive savings by 10 years’ declares the Financial Times. “Men in the US Could Outlive Retirement Savings by 8 Years,” declares Barron’s. “Most Canadians will outlive their savings by a decade,” says The Globe and Mail. It looks like the retirement crisis has gone global.
Except, well, not. The World Economic Forum study is mistaken, in about the simplest way possible.
But first, let’s run through the Forum’s math. The Forum assumes that retirees need an income equal to about 70% of their pre-retirement earnings. Fair enough: that’s about what most financial advisors recommend.
And the Forum calculates that a typical American would have savings at age 65 sufficient equal to 5.75 times their final salary. Those savings are enough to cover 9.7 years of spending at that 70% replacement rate. Since life expectancy at retirement age is about two decades – a bit more for women, a bit less for men – this leaves the typical American about 10 years short of what they need. And we’re not alone: the Netherlands, the U.K., Japan, Australia, Canada…we’re all in pretty much the same boat. That would be the retirement crisis.
So what’s the simple trick that creates this worldwide post-career crisis: ignore Social Security! Yes, ignore it, pretend it didn’t exist. As the Forum report states, “These outcomes exclude any other benefits, such as corporate defined benefit pensions or government benefits such as social security.”
This is insane. Whatever Social Security’s problems, the chances that Social Security benefits will go to zero is, well, about zero. And the same goes for government pension plans in other countries. A retirement savings study that doesn’t account for Social Security is worse than useless.
What happens if we take the shocking step of assuming Social Security won’t be eliminated?
Well, the average retiree gets a Social Security benefit equal to about half his pre-retirement earnings. With that 50% replacement rate in place, he needs to save to get his total retirement income to a 70% replacement rate. That means he’s responsible for 20%.
Here comes the math, so get ready: if the World Economic Forum finds the average American can out of their own savings afford 9.7 years of retirement at a 70% replacement rate, that’s an amount equal to 679% of a single year’s earnings. Divide that by the 20% residual replacement rate the retiree has to provide on top of Social Security and you get – wait for it! – 34 years.
So, using the one simple trick of not assuming the complete and total elimination of Social Security benefits, we’ve taken Americans from facing a decade long post-work savings deficit to having an extra decade of income to spare. And the same goes for retirees in other countries as well.
Once again, Americans and now people around the globe are frightened about their retirement security by analysis that stinks and a news media that isn’t mathematically literate enough to smell it.