Are You Actually Prepared for Retirement?

If you’re actually truly prepared for retirement, you’re in the minority in California.

A 2019 study from the UC Berkeley Center for Labor Research and Education revealed that nearly half of private-sector employees in the state have no retirement savings. While 46% of those working in the private sector reported that they had some sort of retirement savings account or pension, some had to make those arrangements on their own. Only 39% had access to employer-sponsored retirement plans. 

While starting your own 401(k) or other retirement account is a good idea if you don’t have access to an employer plan, those with employer-sponsored 401(k) accounts and other retirement plans typically have an advantage, since many employers match contributions. 

Among those who did report having retirement savings or pension plans, some were limited. For example, 6% of those who said they had some retirement assets reported only profit sharing or pension benefits from a previous employer. And, of course, contributions and the length of time accounts have to accrue interest differ, meaning that some who have retirement assets are well-prepared for retirement, while others have nowhere near enough to sustain them when their working years come to an end. For many, that means working later and later in life just to make ends meet.

The situation appears to be getting worse. Between 2007 and 2017, there was a 9.5% increase in the number of private-sector employees between the ages of 25 and 64. But, during that same time, the number of workers with access to an employer-sponsored 401(k) or pension plan dropped by 11%. 

What Does this Mean for California Workers? 

Under-preparation for retirement puts California workers at risk. And, that risk is magnified by the uncertain future of Social Security benefits, which many working class retirees depend on in whole or part. The Social Security Administration (SSA) has assessed its fund and determined that without changes, it will only be able to pay full benefits until 2037. If you’re 50 years old in 2020, that’s the year you’re scheduled to become eligible for full benefits. If recently-discussed changes to the payroll tax take place, funds could be exhausted much sooner.

In other words, no one should be counting on Social Security to support them in retirement. Anyone who neglects retirement planning is at risk.

Who is Most Affected? 

The news isn’t good for any group. A majority of private-sector workers across races are without access to employer-based retirement accounts. But, some demographics are at a greater disadvantage. 69% of Latinx private-sector workers didn’t have access to workplace retirement plans. This group was twice as likely as white employees to be without a retirement account or pension. 

The California study didn’t break out workers by age, but a nationwide analysis by the Economic Policy Institute (EPI) did. The EPI study showed that older Americans were somewhat more likely to have retirement savings than younger ones, but the difference wasn’t as significant as you might expect. About 58% of people aged 32-61 had some retirement savings. About half of the youngest sector of the group reported having retirement accounts, compared with about ⅔ of those aged 56-61. 

In other words, nearly ⅓ of U.S. families in the decade leading up to traditional retirement age said they had no retirement savings. And, the situation isn’t improving. The percentage of households with retirement accounts has declined since 2007.

Older Americans with retirement accounts do have more saved than their younger counterparts, likely due in large part to funds growing over longer stretches of time. The average for those nearing retirement age is $243,559, according to EPI. That may sound like a lot of money, but many experts say retirees should expect to need about 75-80% of their regular annual income in retirement. That means for a person earning $60,000/year, that $243,559 may only last five to six years. 

Unsurprisingly, those in lower-earning sectors are less likely to have retirement savings. Those who do have retirement accounts have a much lower average balance than higher earners. In California, ¾ of low-income workers have no retirement savings. 

As income inequality has continued to increase in the United States, so has the gap in retirement preparation. In fact, the EPI report says retirement inequality is even greater than income inequality.

What to Do if You’re Behind on Retirement Savings

First, get started. Because of the way retirement accounts grow, even small amounts of money deposited while you’re young and many years from retirement can grow into significant sums. That power decreases as you age. If you accrue $5,000 in a retirement account between the ages of 20 and 25 and then never touch it again until you retire at 67, you’ll have more than $57,000 (assuming annual compounding and an average gain of 6%). At 50, a $5,000 deposit would net you just under $13,500 by retirement age.

Of course, it’s never too late to start. Some retirement savings is better than none, and you may have opportunities to play catch-up and stay tax-deferred if you’re older and are behind on retirement contributions. 

CalSavers Expands Access to Retirement Accounts

For many working California residents, one significant obstacle is being eliminated. Most California employers with more than 100 workers that don’t offer company-sponsored retirement plans were required to register for CalSavers by September 30, 2020. Employees of those companies will receive notification, and will have 30 days to opt-out or make changes to their plans. If you don’t take any action, you’ll automatically be set up with an IRA (individual retirement account). You can also register if you’re self-employed.

If you don’t have access to either an employer-sponsored plan or CalSavers, it’s time to explore your options. While setting aside money in a savings account or investments can provide some protection for retirement, official retirement accounts provide special benefits, including deferral of income taxes on some contributions and powerful protections against creditors. 

The attorneys at Borowitz & Clark have dedicated their practice to helping people resolve debt problems and secure their financial futures. If overwhelming debt is compromising your ability to prepare for retirement, help is available. Schedule a free consultation right now by calling 877-439-9717 or filling out the contact form on this page.