The past five years have encapsulated a changing landscape many Americans have struggled to cope with. Inflationary changes, a recent shift to high interest rates, and even political instability have made Americans question their financial future.
Although optimism in personal retirement plans has improved from its freefall in 2023, overall confidence hasn’t fully recovered. The Employee Benefit Research Institute’s 2024 Retirement Confidence Survey found that 68% of workers and 74% of retirees are confident they will have enough money to live comfortably.
Related: How average Americans can better plan for 401(k), retirement income
However, inflation remains a top concern for everyone: among those not confident in their retirement plan, 31% of workers and 40% of retirees note inflation as the main reason. In keeping with this, Americans feel they will likely need more money than anticipated to retire and believe government programs like Social Security could use an overhaul.
The Nationwide Retirement Institute’s recently released 2024 Social Security Survey found that 72% of U.S. adults are worried Social Security will run out before they retire. A staggering two-thirds (69%) of Americans note that Social Security reform will impact how they vote in the 2024 presidential election. Social Security and inflation have become key indicators of retirement perception.
A modest retirement nest egg helps increase confidence in retirement plans
PGIM, Prudential Financial's asset management arm, recently released its Retirement Crisis: Perception vs. Reality survey, which examines consumer sentiment on retirement. The findings show that although retirement is top of mind for workers and retirees, most do not believe a retirement crisis is afoot.
According to PGIM's Retirement Confidence Index, retirement confidence has been stagnating since 2022 due to a perfect storm of surging inflation, interest rate hikes, and poor investment performance.
However, the study found that all hope is not lost: perceptions of a retirement crisis drop significantly as workers approach retirement age.
More on personal finance:
- How your mortgage is key to early retirement
- Social Security benefits report confirms major changes are coming
- The average American faces one major 401(k) retirement dilemma
TheStreet spoke with David Blanchett, PGIM's Managing Director, Portfolio Manager, and Head of Retirement Research, to get more context on the data and learn why consumers may feel apprehensive but the overall retirement outlook may not be as dire as people think.
“What you see is people have these expectations about how much they need and what they should be doing," Blanchett notes. "And, yes, it's true that many Americans are behind. What's also important is that retirees are finding a way to make it work.”
“This perception of a crisis tends to decline as people move through retirement," he continued. "If you look at individuals over the last 30 years, there's this powerful effect when people first retire; they often have concerns about retirement. But as they move through retirement, those usually dissipate. You see a significant reshift among those who might have initially been concerned.”
He adds, “There are obviously some who are a bit dissatisfied, but this notion of retirement crisis deserves more context because we don't see that. When you look at the data objectively, retirees, by and large, are a pretty happy bunch. They make things work. And that just isn't the same as a narrative of a full-on crisis.”
However, even saving up a modest nest egg and realistically assessing expenses can soothe workers' concerns.
“The level of what you need to have saved not to perceive your situation as a crisis is actually a lot lower than what many individuals think it should be," Blanchett said. "So, I think the key is to focus on the things you can control. You don't necessarily have to have a million dollars to be okay. Work towards what's reasonable, and realize you'll have to make some tough choices, and don't think that needs to be a negative thing.”
Shutterstock
Social Security offers a guardrail against inflation
The status of an individual’s personal retirement situation is one of the most significant factors shaping their view on whether there is a widespread retirement crisis. Those who describe their financial situation as in crisis are twice as likely to agree that there’s a national retirement crisis, yet only 22% of those with $10,000 to $50,000 saved for retirement believe there's a crisis.
Blanchett suggests that the amount of money needed in savings to reduce concerns about retirement is feasible for the average American, and they shouldn’t feel discouraged by not being exactly where they’d like to be financially.
“I'm worried that we're moving these goalposts to this unachievable target that people just give up because they don’t believe they’ll ever get there," he said. "I call it a retirement income challenge, not a retirement crisis because we need to address some things. There are things we can improve; that's certainly true. But collectively, things aren't as bad as they're often portrayed.”
Americans can breathe a small sigh of relief knowing that the U.S. has a robust Social Security program. While there are valid concerns about the program's viability that need addressing, the situation may not be as dire as most people think.
Related: How to maximize Social Security survivor benefits in retirement
Still, most consumers are concerned that Social Security will run out in their lifetime, and one in four Americans think they won’t ever receive any money from the program. While the program may not be perfect, a few policy changes could extend its long-term utility and improve consumer confidence in retirement.
Blanchett agrees.
“We have relatively generous public pension systems in place to ensure that most Americans have some means to get by," he said. "Now, I think we should be doing things to improve our system, and we're seeing that start to happen.”
Given that 91% of retirees report Social Security as a source of income, and 62% state that it is a significant source of income, it’s clear that Social Security provides a crucial safety net to nearly all retirees. For this reason, Social Security reform is popular across most age groups and has garnered bipartisan support from Democrats and Republicans.
Increasing the minimum Social Security eligibility age from 62 to 64 for those younger than 50 was supported by 66% of all respondents, and increasing the full retirement age from 67 to 69 for those under 50 was supported by 51%. Increasing taxes on those in high-income brackets to increase social security benefits was also popular amongst 47%, and decreasing taxes on social security benefits was supported by 40%.
Blanchett acknowledges that while inflation has become more of a threat, Social Security provides a buffer against it.
“Inflation is a relatively new risk cited among retirees. There is a larger concern about the long-term implications of inflation on retirement security. However, the important point is that Social Security benefits are explicitly linked to inflation," he said. "You cannot buy any other lifetime income product that is explicitly linked to inflation today. So the good news is that this government program provides excellent protection against inflation.”
Retirement planning doesn’t have to be overwhelming. Here are a few tips to help savers slowly build toward their financial goals:
- Start small. Create a retirement plan with a monetary goal based on your personal finances instead of an arbitrary number. Take small steps to reach those goals over a set timeline.
- Familiarize yourself with Social Security now. Once you can identify how much you'll be eligible to receive from the program, you can plan how much supplemental income you might need from a 401(k) or pension plan.
- Work towards realistic personal goals. Having housing that is entirely paid off by the time you enter retirement can be extremely helpful and can considerably impact retirement expenses.
Related: Veteran fund manager picks favorite stocks for 2024
