Retirement Savings Tracker and Future ‘Pension’ Estimator

Retirement Savings Tracker and Future ‘Pension’ Estimator

In this issue:

• Gen X’s Retirement Savings Shortfall
• Introducing Retirement Savings Tracker & Future ‘Pension’ Estimator
• Retirement Savings Tracker
• Most Popular Bond Funds in 401(k) Plans
• Market Overview

Gen X’s Retirement Savings Shortfall

Generation X, born between 1965 and 1980, is grappling with a substantial gap in retirement savings. Recent surveys have shown a concerning trend among those in this generation approaching retirement age. As the oldest Gen Xers prepare to turn 60 in 2025, many are finding themselves underprepared for their golden years.

Savings Shortfall

According to Schroders’ 2024 U.S. Retirement Survey, Gen X workers believe they need an average of $1,069,746 for a comfortable retirement. However, they expect to accumulate only $602,944, leaving a staggering shortfall of $466,802

Retirement Readiness

The outlook is bleak, with only 14% of Gen Xers feeling financially prepared for retirement.  Moreover, only 58% of Gen X respondents expect their monthly retirement income to be the same or more than their current income.

Major Factors Contributing to the Crisis

Several factors have contributed to this looming crisis:

1. One major reason for this shortfall is the decline of traditional pensions. Gen X is the first generation to largely lose access to defined benefit plans that guarantee a stable retirement income. 
2. The shift to 401(k) plans and self-directed retirement savings has not been effectively managed by Gen X. Many in this generation lack proper retirement planning, financial guidance, and the discipline needed to build sufficient savings.
3. Gen Xers are also part of the ‘sandwich generation’ with responsibility for elderly parents and older children’s education
4. Additionally, Gen X has faced unique economic challenges during their peak earning years. They endured the Great Recession of 2008, the impact of COVID-19, and the recent pressures of inflation. These factors, combined with rising costs for housing, education, and healthcare, have left little room for meaningful retirement contributions.

Unlike Baby Boomers, who could often rely on pensions, or Millennials, who have been warned early about the need to save, Gen X has been caught in a transitional period with fewer safety nets and greater economic volatility. This combination of factors has left many Gen Xers vulnerable to a retirement shortfall, with some needing to work longer or make significant lifestyle adjustments to compensate for their savings gap.

Introducing Retirement Savings Tracker & Future ‘Pension’ Estimator

We are introducing a Free Retirement Savings Tracker (or Calculator) that enables you to continuously calculate and monitor your retirement savings. This tracker estimates your total savings at your expected retirement age and employs a straightforward rule of thumb, like the popular 4% expected annual withdrawal rate, to determine the annual “pension” you could derive. Additionally, it provides inflation-adjusted expected savings and income, which essentially reflect today’s dollar value.

The Challenge for Self-Funded Retirement Investors

As we outlined above, the number one challenge for American retirement income today is that most individuals have no guaranteed income beyond Social Security, which can only cover a small portion of their retirement needs. They must rely on 401(k)s, IRAs, and other self-savings for their future retirement spending. The following are additional challenges they face:

1. Longevity Risk:
   • Many retirees underestimate how long they’ll live, leading to the risk of outliving their savings.
   • Without a clear understanding of how much you can sustainably withdraw each year, it’s easy to overspend early or fall short later.
2. Market Volatility:
   • Self-funded investors are subject to market fluctuations, which can affect portfolio values right before or during retirement.
3. Complex Calculations:
   • Determining how much you need to save and how long your savings will last requires a detailed understanding of compounding growth, withdrawal rates, and investment returns.

Why Retirement Savings Tracker & ‘Pension’ Estimator?

Perhaps the most important reason is that the tracker enables individuals to save consistently to their 401(k), IRA, and other accounts by monitoring the progress of their retirement savings as a growing “pension”. Furthermore, it has the following advantages: 

1. Understanding Sustainable Income:
   • A Retirement Savings Tracker translates your total retirement savings into an annual “pension-like” income that can be easier to understand, especially with the inflation-adjusted today’s dollar value. 
   • By using some popular assumptions such as a 4% withdrawal rate, you can estimate how much money you can withdraw yearly without depleting your savings too quickly.
2. Setting Clear Goals:
   • Knowing how much you’ll need in retirement allows you to set specific savings goals.
   • Tracking your current savings against projected retirement needs ensures you stay on track to meet your goals.
3. Adjusting for Life Changes:
   • A Retirement Savings Tracker allows you to adjust for:
     • Changes in retirement age.
     • Adjusted annual withdrawal rates.
     • Updated expected returns based on market trends or asset allocation.
   • This flexibility ensures your plan evolves with your financial situation.

In the following, we will show you how to use the Retirement Savings Tracker (or Calculator).

Tools & Tips: Retirement Savings Tracker (or Calculator)

The following is the screenshot of Retirement Savings Tracker (or Calculator):

You can enter multiple savings accounts. A simple way to keep track of your retirement savings is to conduct an annual checkup, for example, during tax filing time. You can easily update your retirement account values (to keep track, you’ll need to have a MyPlanIQ account). You can also modify the input parameters to get instant estimates. Additionally, over time, you can view your savings history chart to see how you have been progressing over the years.

Here are a couple of important points to consider:

• Annual withdrawal rate: This input represents your expected withdrawal rate during retirement. It is strongly advised not to set this number higher than 4%, as a higher withdrawal rate can deplete your savings rapidly. However, a 4% withdrawal rate typically covers at least 25 years, assuming your savings continue to grow enough to keep pace with inflation.
• The tool also provides today’s dollar value (inflation-adjusted outputs) for both expected total savings and expected annual “pension.” These values represent today’s dollar amounts, as inflation erodes your purchasing power over time. Therefore, they need to be adjusted to reflect their real purchasing power. Additionally, you can play with the tool to see how the expected annual inflation input affects the anticipated inflation-adjusted savings and “pension.”
• The default value for annual inflation is set at 2.5%, which has been the norm for the past 20 years or so. However, this figure may change in the future, so it’s important to adjust it accordingly. The average inflation rate in the United States since 1900 has been approximately 3.1% per year.
• Using the above screenshot, one can quickly perform a back-of-the-envelope calculation. Assuming a 2.6% annual inflation rate and a 4% annual withdrawal rate, saving for 30 years (from age 37 to a retirement age of 67) would likely yield about one-tenth of your annual “pension.” For example, a savings of $100,000 would result in an inflation-adjusted “pension” of $10,952 per year. We believe such a quick and rough estimate can be very helpful; however, it’s important not to rely solely on this method.
• We strongly encourage you to enter your savings numbers in an obfuscated way, such as by dividing or multiplying by numbers like 100 or 20. This approach will help protect your privacy.

This tool provides valuable insights for individuals who rely partially or fully on self-funded retirement savings. We will continue to enhance this tool by incorporating various types of savings and considering additional sources of retirement income, such as Social Security and annuities.

We aim to make this tool an essential Free resource for managing self-funded retirement savings.

Employer Stock Ownership Plan or Employer Stock Fund In a Retirement Plan

You often see your company offering its stocks as a fund within a retirement plan or providing an Employee Stock Ownership Plan (ESOP). According to the latest available data, there are approximately 6,322 unique companies in the United States that offer Employee Stock Ownership Plans (ESOPs) or company stocks in their retirement plans. This number can be broken down as follows:

1. Private companies with ESOPs: 5,866
2. Publicly traded companies with ESOPs: 456

The total number of ESOPs in the United States is 6,533, holding assets worth over $2.1 trillion. Some companies sponsor multiple plans, which explains the difference between the number of unique companies and the total number of ESOPs.

It’s important to note that while the number of companies offering ESOPs is relatively small compared to the total number of businesses in the U.S., these plans cover a significant number of employees. Data shows that ESOPs have a total of 14,743,633 participants, meaning that about 9% of the U.S. workforce is involved in ESOPs.

On the other hand, the number of companies offering company or employer stock as a fund option in their retirement plans has steadily declined to 8% in 2022. However, 38% of large companies with 5,000 or more employees still provide company stock as an investment option in their defined contribution plans.

Employer stock in a retirement plan is a double-edged sword. Many have witnessed devastating outcomes, like the cases of Enron and, more recently, General Electric. However, anecdotally, we also hear stories of some employees who have accumulated multi-million dollar 401(k) accounts solely because the employer stock in their accounts has appreciated hundreds of times!

Market Overview

Stocks have declined continuously in the final weeks of 2024, defying the so-called Santa Claus rally. However, given the substantial gains that a broad stock index has achieved in the U.S., investors with exposure to large-cap U.S. stocks are likely not complaining too much.

The following table shows the major asset price returns, as of last Friday: 

Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?