Need some good news about American retirement?
A recent survey by the Transamerica Center for Retirement Studies looked at how retirement savings behaviors and expectations have evolved during the Covid-19 pandemic.
Some of its findings were grim. Six in 10 respondents said they were concerned about their mental and physical health while the median respondent had just $5,000 in emergency savings.
Yet there were also glimmers of hope. More than 80% of respondents saved for retirement during the pandemic, in either employer-sponsored plans or individual retirement accounts (IRAs). Younger respondents—millennials and members of Generation Z—started saving much earlier than their parents, which means their assets will have more time to grow.
“People are doing an admirable job,” said Catherine Collinson, president and CEO of the Transamerica Center for Retirement Studies. “With everything that they’ve had to face, it’s very impressive people are still planning about their future.”
The retirement crisis has by no means magically abated, but the Transamerica survey has uncovered green shoots of bullishness. Tens of millions of workers held up well during one of the most harrowing times of their lives—and that should give everyone confidence they have the power to take control of their retirement goals.
Younger Americans Prioritized Retirement Despite the Pandemic
One of Transamerica’s more hopeful findings concerns younger Americans with decades to go until retirement. Not only are 70% of Generation Z respondents putting money away, but they also started saving at the remarkably young age of 19. Millennials are saving at nearly the same rate as Gen Xers—82% and 84%, respectively—but they began at the age of 25 on average, compared to age 30 for Gen X.
Starting young is one of the most powerful retirement strategies. When you begin saving as early as possible, you position yourself to reap the benefits of compounding returns over a longer timeframe.
Consider a 25 year old who earns an annual salary of $60,000 and saves 10% a year in a 401(k), plus employer matching contributions. Let’s say they continued saving at this rate for 10 years and then stopped making any more contributions. By the time they turned 65, their retirement savings balance would be more than $630,000, assuming a steady 7% average annual return on investment.
Compare that outcome to someone who doesn’t begin saving for retirement at all until they turn 35. If they earned and saved the same amounts, but never stopped putting money away, their retirement savings balance would only be around $567,000 by the time they turned 65 (assuming the same ROI).
Our hypothetical retirement investors illustrate the power of starting early and saving as much as possible. Younger workers who pursue this strategy can get their retirement game on a strong footing for the rest of their careers.
Older Americans Saw Their Assets Grow
Events over the past 18 months should also buttress the spirits of millions of older workers, too. Take real estate prices. Roughly 80% of households helmed by someone 65 or older own a home, according to the Federal Reserve, and home equity is one of the biggest assets of many soon-to-be retirees.
In an odd twist, home prices exploded during the pandemic. The median sale price of a home was about $294,000 in June 2020, according to the National Association of Realtors. One year later, it had jumped 23% to more than $363,000.
Meanwhile, the S&P 500 delivered a total return of 16% in 2020 despite the historically brief bear market. It’s up another 17% so far in 2021. These gains redounded to the benefit of many future retirees.
The average account balance among those with a Vanguard retirement fund, for instance, was almost $129,000 by the end of 2020, a 21% increase over the previous year driven largely by stock market performance, rather than additional contributions.
Even Social Security, the most important savings instrument for most Americans, came out of the past year relatively unscathed.
The Covid recession was the shortest on record, with the sky-high unemployment rate of almost 15% in April 2020, dropping rapidly to 6.7% by the end of the year. That’s important, because your Social Security benefits depend on your highest 35 years of earnings, so less time out of work improves your odds of having a higher benefit once you claim.
Signs of Stress in the Data
One third of respondents in Transamerica’s survey said they had dipped into their retirement savings for a loan or a hardship withdrawal. This will mean potential costs for them in forgone capital gains or tax bills if the funds aren’t repaid within the window allowed by the stimulus bills. Just a quarter of respondents said they are very confident they’ll be able to afford a comfortable lifestyle when they retire, including just 16% of those in Generation Z.
More broadly, Federal Reserve data show that 24% of adults in 2020 believed they were worse off now than 12 months before, nearly doubling those who said the same in 2019.
And of course a whole lot of Americans don’t have enough saved. Half of Americans are at risk of not owning enough assets to sustain their standard of living once they stop working, according to the Boston College Center for Retirement Research.
The Power of Positivity & Your Retirement Finances
Believing that you have control over your financial destiny is key to improving your actual finances. In fact, when it comes to your financial future, grit is as important as understanding financial concepts themselves, Sarah Asebedo, Texas Tech University assistant professor of financial planning, told Forbes Advisor.
“This creates a resilience to failure and stress and the confidence to use the knowledge that you acquired,” she said.
If you’re a young worker who’s just started saving in a 401(k), give yourself kudos for holding up so well during a pandemic. Your parents never had to navigate such perilous waters.
And if you haven’t started saving, take action. Open an IRA if your employer doesn’t have a plan of its own. Start small; chip in $5 a week to get going. The positive vibes from those small wins will spur you on.
Once you’ve begun to gain confidence, it’s time to start thinking about a financial plan. Make a budget, decide which expenses are necessary in your life and which ones should be pushed to the side so you can improve your savings. Set short, medium and long term goals. Maybe even start an account with a robo-advisor if you need some help.
While the Fed found that a lot of people were down on their finances this year compared to last, it also found that 77% of Americans were at least doing OK financially in July 2020. That was a 2 percentage point increase from 2019, and a 15-point bump from 2013. How can both be true?
Maybe part of the disaster narrative is a collective despair that worse days are ahead.
But the future is looking brighter than what we might have reasonably expected a year ago. Of course there are problems, but they can be conquered. If you can make it through a pandemic, you can fund your retirement.
