If there was a golden age of retirement, it would be now. For most of human history, people worked until they were physically unable to, then spent the rest of their lives either poor or dependent on their families. This changed in the early to mid-twentieth century when many economically developed countries adopted various retirement programs that paid income during retirement. The United States pays social security benefits and also offers tax incentives for employers to offer retirement plans.
It’s tempting to romanticize the 1960s and 1970s, when companies primarily offered traditional retirement plans that paid a steady income until you died. But assuming all the market and worker longevity risks was costly for employers. Once companies were required to adequately fund their pensions to account for this risk, most abandoned them. A notable exception are public sector employers who follow different accounting standards (which do not consider risk) and still offer traditional pensions.
But even at their peak, only about 38% of private-sector workers had defined-benefit plans, and many had higher incomes, leaving most Americans to fend for themselves. When cheaper solutions became available — as in defined contribution plans such as 401(k) — retirement benefits became more common. In 2019, about 57% of American workers had some form of retirement plan.
Better access to retirement accounts means people are retiring with more money than before. The figure below depicts the average balance of financial assets of Americans aged 65 to 69 from 1989 to 2019. This includes all retirement accounts, retirement plans, bank accounts, stock portfolios, and any other financial asset. Of course, many people still don’t have access to retirement accounts through their jobs or don’t have extra income to save. But most retirees have a lot more money than before.
More money means more retirement income. One study looked at the IRS records of 5% of U.S. retirees and estimated that income increased by 10% to 12% for people aged 70 in 2011 compared to 2000. Among people aged 80 income was about 5% higher in 2016 than in 2010 at the median of the income distribution, 8% higher at the 75th percentile, but 0.8% lower for the bottom 25th. Overall, the data shows that people have more or nearly the same income as previous cohorts of retirees.
Our government benefits are also worth much more now. When interest rates fall, as they have for the past 30 years, the value of low-risk incomes like Social Security rises. Yes, medical costs have increased, but this also reflects the fact that health care has become much more efficient in keeping us alive and improving our quality of life. Medicare has also become more generous: think, for example, of the creation of prescription drug insurance in 2003.
It’s also true that you can expect to live longer in retirement and that means your money should last longer. But isn’t that a good problem to have? You’re probably also healthier than former retirees your age, which means you can work part-time for years until retirement if you need to improve your financial situation.
Before you get too confident, though, I have to add this caveat: retirement these days isn’t easy. When you’re living longer and don’t want to run out of money before you dance your last dance, figuring out how much you can safely spend each year is a very difficult problem – especially when markets are volatile and inflation is high and unpredictable.
To make matters worse, current conventional wisdom, such as the 4% rule or spending your required minimum drawdown (RMD), would suggest that you should cut back on your spending in an economy like the one we are experiencing today. But that’s easier said than done when your money will buy less with inflation at 8.5%, and many retirees feeling ready to travel and socialize after years of pandemic isolation.
In finance, any strategy that forces you to cut spending at the worst possible time is considered a failure. Yet, for whatever reason, millions of retirees are advised to follow a strategy that does just that. So if you want to do better and don’t want to buy an annuity with your savings, you need to be more strategic.
Divide your spending into wants and needs. Fund your needs (housing costs, food) with stable, inflation-protected income like social security or inflation-indexed bonds. Then fund your needs based on the performance of your risky assets (a good investment choice would be cheap, well-diversified equity funds) and balance those decisions with your personal circumstances. If this is the year you feel you really need to take a vacation with your grandkids, so be it. You can at least rest assured that while you’re splurging, your needs are being funded with low-risk assets, so you know you’ll be fine in the future.
Defined-contribution plans like your 401(k) have come in for a lot of criticism over the years, but they’re the biggest reason many retirees will be better off than previous generations. This means baby boomers are entering retirement wealthier than previous generations, but burdened with a very complex risk problem: how to spend that money. So if you want to worry about your retirement, worry about it – at times like these the problem is harder to solve than ever.
More from Bloomberg Opinion:
• Piecemeal reform will not solve the US pension crisis: editorial
• Saving for retirement is harder than it should be: Editorial
• How to Fix America’s Broken Retirement Savings System: Editorial
• The pension crisis in the United States is also a financial crisis: editorial
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk”.
More stories like this are available at bloomberg.com/opinion