Why we aren’t saving enough for retirement

U.S. stock indexes continue to hit new all-time high levels, though not with the usual hoopla.

Perhaps politics is overshadowing market performance, but there is also evidence that almost half the country has little reason to care. Just 52% of Americans own stocks or stock mutual funds either inside or outside of a retirement account. And that half doesn't tell the whole story.

A research 2017 paper by New York University professor Edward N. Wolff found that “despite the fact that almost half of all households owned stock shares either directly or indirectly through mutual funds, trusts, or various pension accounts, the richest 10% of households controlled 84% of the total value of these stocks in 2016.”

I thought about these stats after the IRS announced its annual inflation adjustments to retirement plan contributions for tax year 2020. If you participate in a 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan, you will be able to contribute a maximum of $19,500 next year, up $500 from 2019.

The catch-up contribution for employees ages 50 and over in these plans will increase from $6,000 to $6,500. (Note: The limit on annual contributions to traditional and Roth IRAs is unchanged at $6,000, as is the catch-up contribution for those over 50, which stays at $1,000.)

For many Americans, these limits are irrelevant because they are not even close to maximizing their contributions. It's not due to some moral flaw.

According to a recent paper from the Center for Retirement Research at Boston College, for workers to accumulate substantial retirement savings, they must contribute regularly to their plans, keep their money in the accounts and they also need to maximize after-fee returns.

That's a tall order, according to the authors, who say the reason that most workers have 401(k)/IRA balances at retirement that are “substantially below their potential” is due to aspects of the U.S. retirement system that make it difficult to achieve these goals.

The two biggest factors that contribute to the low level of retirement savings are “the immaturity of the system” and “the lack of universal coverage.” The paper notes that the shift from employer-funded pensions to employee funded retirement accounts occurred in the 1980s, which means “many of today's 60-year-olds did not participate in a 401(k) plan when they were young workers.”

Additionally, many workers today still do not participate in plans, either because the employer does not offer one or because they are not eligible to participate.

Of those who do participate, some retirement balances shrink over time due to “leakages,” which include the ability to cash out when changing jobs, in-service withdrawals (hardship and tax-free withdrawals beginning at age 59 ½), and loans; and those dastardly fees.

The low level of savings, combined with increasing life expectancies, explains why many older Americans are staying in their jobs longer.

According to AARP, “Americans 55 and older make up slightly less than a quarter of the nation's labor force, but they filled almost half (49%) of the 2.9 million jobs gained in 2018 — the biggest share of any age group.”