The looming US retirement crisis: Key takeaways for investors

Russ Koesterich, CFA - Author

Aug. 18 2020, Updated 5:19 a.m. ET

The good news is that while the recovery has impressed few, it has been much better than the alternative we were all facing six years ago, and there is still time to avoid, or at least mitigate, the pending retirement crisis. The bad news is that, following six years of post-crisis reform fatigue, neither the government nor U.S. households are showing much inclination to do so.

Market Realist – The graph above shows the increasing entitlement spending in the U.S. from 1990 to 2013. As the population continues to age, these costs are only set to rise.

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According to a post on the retirement crisis by Larry Fink, CEO of BlackRock, more than one-third of the retired population depends on social security programs for more than 90% of their income. Fink has attributed this statistic to the lack of adequate traditionally defined benefit pension contribution plans.

According to Fink, almost half of private sector workers aren’t covered by any employer-sponsored retirement plans, including 401(k). According to estimates by the Employee Benefit Research Institute, close to 70% of workers don’t have personal savings to fund their retirement.

Fink also mentioned that the 30% of workers who are trying to save tend to be over-cautious while making investments in the U.S. equity markets (SPY). They are investing their savings in low-yielding U.S. Treasuries (TLT)(IEF) and bond markets (BND) instead of U.S. stock markets (IVV).

The economy has been able to recover from the financial (XLF) crisis of 2008 but the low level of preparedness for retirement and the aging U.S. population clearly point to an impending retirement crisis. A mandatory savings program instituted to supplement the current social security programs along with reforms in social security would go a long way in helping avert the crisis.

Read our series Why the banking sector is better, but with room for improvement to understand how the banking sector has evolved since the financial crisis.


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