Retirement Income Challenges in the Twenty-First Century

Ongoing social, economic, demographic, and policy changes are transforming the way Americans prepare for retirement and raising concern about the economic well-being of future retirees. One of the most important trends has been the shift away from traditional employer-sponsored pension plans in the private sector. A generation ago most people working at large firms could leave their retirement planning on auto pilot, because their employers guaranteed retirees lifetime income streams based typically on how much they earned near the end of their careers and how long they worked. Today, those traditional defined benefit pension plans have largely been supplanted by 401(k)-type plans that enable workers to set aside part of their paycheck in tax-deferred savings accounts, generally supplemented by employer contributions.

These do-it-yourself retirement plans can generate substantial retirement income only if workers choose to make significant contributions to their accounts each pay period, invest the funds prudently, resist the temptation to dip into their accounts before they retire, and manage their funds wisely after they retire. The evidence suggests that for most Americans 401(k) plans have fallen short so far (Munnell and Sunden 2005). In 2010 the median value of retirement accounts held by households ages 55 to 64 totaled just $100,000 (Bricker, Kennickell, Moore, and Sabelhaus 2012), which would generate a lifetime income stream beginning at age 65 of only about $500 per month.

The Urban Institute