Retirement Savings Is a Bigger Crisis Than Health Care
Everyone talks about how health care is the biggest crisis facing retirees, but unfortunately that crisis takes a distant second to another, far more serious issue.
Most retirees don't have any money.
A 2015 National Institute on Retirement Security study found that the median working-age household has just $14,500 in retirement savings -- woefully short of the hundreds of thousands in savings truly needed to retire in the first place.
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That's not to say that health care isn't a retirement crisis in and of itself -- it is. But when comparing and contrasting the two, it's clear which one is more pressing, and it isn't soaring drug prices.
The extremely troublesome retirement savings numbers. One of the authors of the 2015 NIRS study, Ilana Boivie, agrees that the $14,500 figure is startlingly low. But why?
"Forty-five percent of all households, and 41 percent of near-retirement households, do not have a retirement account at all. So, when you take all of these people into account (who essentially have $0), the median balance is very low," Boivie says.
But even when you only consider those people with retirement accounts, the average person near retirement age has just $104,000 in investments saved up.
"Even this is far less than what people need for a secure retirement. Converted to an annuity, it would only bring in a few hundred dollars per month," Boivie says.
By the time someone is 67, experts recommend having anywhere from five to eight times your annual income saved up for your golden years. Seeing as most employed Americans make far more than $13,000 to $20,800 in their final years of employment, you can see how devastatingly low that $104,000 figure is.
Considering many Americans have traditional IRAs and 401(k)s, that means they'll have to pay tax on their earnings when they withdraw their funds, further diminishing the size of their investments.
Health care. That said, health care costs are also on the rise, and that remains one of the most prominent, concerns facing soon-to-be retirees.
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Numbers from PwC, the international auditor and professional services firm, shows the troublesome reason health care continues to become more unaffordable: Reliably each year, health care costs rise by more -- far, far more, in fact -- than inflation.
In 2007, health care costs rose by 11.9 percent. Though that growth rate has been declining, coming down to 6.5 percent in 2016, it's still light years higher than inflation. The pace of inflation in 2007 and 2016, respectively, was 2.8 percent and 1.3 percent.
While rising drug prices certainly contribute to this issue, another problem for many retirees is the cost of places like retirement homes.
"Almost 70 percent of people over age 65 will require long-term care services at some point, and more than 40 percent will need nursing home care," says Pamela Yellen, a two-time New York Times bestselling author and financial security expert.
"Based on the average cost of a private nursing home and the average length of stay, you would need about $255,000 to cover a stay," Yellen says.
In other words, average nursing home costs alone are more than 2.5 times what the typical retiree has saved up.
So why isn't health care the central part of the retirement savings crisis? Because of this sad truth: The debate on soaring health care costs is totally irrelevant if you have no savings to begin with. It doesn't matter how cheap something is or how much you plan in your later years if you can't afford it at almost any price.
What can be done to solve the retirement savings crisis? Nari Rhee is director of the Retirement Security Program at the University of California-Berkeley Center for Labor Research and Education. Along with Boivie, she was co-author of the 2015 NIRS study that highlighted the severity of the retirement savings crisis with its discovery that the median retirement-age household had just $14,500 saved up.
She says there are two big public policy changes that can help ameliorate the current crisis.
"First and foremost is Social Security. That really is the safety net. It's guaranteed lifetime income. That has to be protected and probably expanded," Rhee says.
"The second thing is: Public policy should be making it a lot easier for workers to save. Some states are offering these automatic IRA programs," says Rhee, citing upcoming programs in Oregon and California. "It would be really good if these large-scale programs got up and running and could show that they can improve the retirement security of workers who've been left out of the employer-sponsored system."
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Sure, everyone should have a retirement plan, and everyone should have a portfolio of investments and make regular contributions to their account over time, taking tax consequences into consideration.
But the ideal solution of simply saving more when you're younger simply isn't possible for people nearing the age of retirement, or for those who don't have benefits like employer-matched plans.
So while saving and investing more is always better, it doesn't do much as a practical solution for people already in their 50s and 60s.
John Divine is an investing reporter for U.S. News & World Report, where he covers financial markets and the economy, with a focus on individual stock analysis. He has been an investor himself for over 10 years, and has been writing professionally about stocks and investing for the last five years. He previously wrote about the stock market for The Motley Fool and InvestorPlace, and his work has appeared on Yahoo! Finance, MSN Money, and AOL DailyFinance. He graduated from Appalachian State University in 2011 with a bachelor's degree in finance and banking. At Appalachian, he was a member of the Bowden Investment Group, a team of students that ran a real-money portfolio worth over $100,000. You can follow him on Twitter or give him the Tip of the Century at jdivine@usnews.com.
