The U.S. economy seems to have split consumers into two distinct groups: those who have and those who have not. This division is evident even among retirees, as research indicates a substantial wealth transfer is currently taking place. Cerulli Associates estimates that a staggering $84 trillion will shift from older to younger generations by 2045. However, despite this massive transfer of wealth, experts warn of a looming retirement savings crisis for individuals who have not adequately prepared for their elder years. According to Chayce Horton, a senior analyst at Cerulli, the wealth transfer is not as widespread as one might think. He notes that a significant amount of wealth has been amassed and is predominantly concentrated in the hands of fewer and older individuals than ever before.
The Impact on Retirement Planning
As the transfer of wealth unfolds, high-net-worth and ultra-high-net-worth households are expected to contribute a significant portion. Cerulli estimates that $35.8 trillion, or 42% of the total wealth transfer, will come from these affluent households, representing just 1.5% of all households. High-net-worth households are defined as having $5 million or more in investable assets, while ultra-high-net-worth households have $10 million or more. While younger generations may ultimately benefit from inheriting these assets, they already have a head start in terms of education and financial support for major milestones like homeownership.
Covering the expenses of retirement has become increasingly challenging, particularly as inflation drives up the costs of healthcare and long-term care for retirees. Fidelity estimates that a 65-year-old individual may need around $157,700 to cover healthcare expenses during retirement, while a retired couple of the same age may require approximately $315,000. These escalating costs, coupled with low retirement savings balances, have fueled concerns about a retirement savings crisis. A recent survey by the National Institute on Retirement Security reveals that 79% of Americans believe there is a retirement crisis, up from 67% in 2020. More than half (55%) express worries about their financial security in retirement.
Despite the record savings rate of 14.2% reported by Fidelity Investments in the first quarter of the year, the average overall 401(k) balance stands at $125,900. However, this figure does not account for nearly half of Americans who lack access to workplace retirement savings plans. To address this disparity, some experts propose mandatory savings plans that would require all individuals to participate. Teresa Ghilarducci, a professor of economics at The New School for Social Research, advocates for early enrollment in pension plans to leverage the power of compound interest and accumulate sufficient savings by retirement age. Professor Ghilarducci emphasizes the importance of getting more individuals to save through workplace retirement plans, citing the success of forced savings initiatives in increasing participation rates among lower-income earners.
The retirement savings crisis is a pressing issue that demands attention and proactive solutions. As wealth continues to transition between generations, it is essential to address the disparities in financial preparedness for retirement. By implementing policies that promote savings and ensure broader access to retirement plans, we can work towards a more secure financial future for all Americans. It is crucial to raise awareness about the importance of early retirement planning and savings habits to avoid a looming crisis in the years to come.