Rosalind Evans
The U.S. economy seems to be splitting consumers into two distinct groups: the haves and the have-nots. This division is particularly evident among retirees, with significant implications for the future. On one hand, a massive wealth transfer is underway, with an estimated $84 trillion expected to shift from older to younger generations by 2045. On the other hand, a potential retirement savings crisis looms for those who haven’t saved enough for their later years.
The Great Wealth Transfer
Research from Cerulli Associates indicates that much of the $84 trillion wealth transfer will come from high-net-worth and ultra-high-net-worth households. These households, representing just 1.5% of all U.S. households, hold $35.8 trillion, or 42%, of the total transfer volume. High-net-worth households have $5 million or more in investable assets, while ultra-high-net-worth households possess $10 million.
“Younger generations may already have a leg up with better education and help for big purchases like buying a home,” said Chayce Horton, senior analyst at Cerulli. However, Horton also noted that the wealth transfer would not be widespread, emphasizing that wealth concentration remains among fewer, older hands.
The Brewing Retirement Savings Crisis
As inflation drives up the cost of healthcare and long-term care, covering retirement expenses has become increasingly challenging. Fidelity estimated that a 65-year-old single individual needs about $157,700 for healthcare costs in retirement, while an average retired couple needs approximately $315,000.
“Those costs have grown substantially to the point where a lot of people are going to die with nothing to pass on,” Horton highlighted.
Public Concern and Financial Security
A recent survey by the National Institute on Retirement Security found that 79% of Americans believe there is a retirement crisis, up from 67% in 2020. Over half (55%) of respondents expressed concerns about not having financial security in retirement. Despite an average 401(k) balance of $125,900 in the first quarter, according to Fidelity Investments, many Americans lack access to workplace retirement savings accounts.
Mandatory Savings Plans
Teresa Ghilarducci, a professor of economics at The New School for Social Research, advocates for mandatory savings plans. In an interview on CNBC’s “Squawk Box,” she stressed the importance of early pension plan participation, citing the power of compound interest. “Getting people in early into a pension plan is the only way they can have enough savings at the end of their working lives to supplement their Social Security,” she said.
Ed Murphy, president and CEO of Empower, also supports this approach, noting that forced savings have proven effective. “Once members of that cohort have access to workplace savings through a payroll deduction, up to 90% will save,” Murphy explained. He emphasized increasing workplace savings to ensure more people are financially prepared for retirement.
The U.S. faces a dual challenge: managing a massive wealth transfer while addressing a looming retirement savings crisis. As wealth continues to concentrate among the older and wealthier population, ensuring financial security requires innovative solutions, such as mandatory savings plans. By fostering early and consistent saving habits, the U.S. can work towards a more secure financial future for its retirees.
