My wife Jo and I spent a weekend last fall at our daughter Holly’s house, enjoying time with our two young grandchildren, three-year-old Brock and eight-year-old Braidyn. With two young boys, the house can get pretty loud. Not only do they run and shout like all little boys, the noisy games they play on my Apple (AAPL) iPad also cause quite a racket. My wife grins when she sees me reach up and turn my hearing aids off… Ah! Relief from the noise.
When I was Braidyn’s age, my great-grandmother was still alive. She would sit on her front porch swing with her walker set to the side, and we would snap peas and shuck lima beans together. I remember her telling me her childhood memories about life after the Civil War. As I watched my young grandsons, I thought to myself: I wonder if my great-grandmother, who was born in 1860, or my grandmother, who was born 1890, ever looked at me and wondered what the world would be like when I got to their age.
As I watched Brock play games on my iPad, I was not only amazed, but I also struggled to imagine what his world would be like 70 years from now, when he will be the age I am today. Will he and his brother still be working? Will they be able to retire? How long can they expect to live?
When I mentioned to my daughter Holly how amazing it is to watch a three-year-old navigate an iPad, she reminded me of how I teased her when she was in grade school, saying that all the kids getting off the bus looked like midget paratroopers with their backpacks full of schoolbooks. She told me that middle-school students now receive iPads from the schools. All their books are downloaded, and they take all their tests on the iPads. She also lamented the fact that they are not learning how to write or communicate to her satisfaction.
Preparing for an Unknown World
And then, like any loving grandparent, my thoughts took a turn: How can I help prepare my grandchildren for a world I am unable to imagine? Once the answer hit me, it seemed alarmingly obvious.
While I cannot imagine every detail about the state of the world in 70 years, I am willing to offer one prediction. According to the Employee Benefit Research Institute (EBRI), only 3% of employees in the private sector have a pension program. Basically, the other 97% of folks in the private sector have to save for retirement through elective, tax-deferred savings accounts like IRAs and 401(k)s.
So, while government employees still have generous pensions, I predict that by the time Braidyn and Brock reach my age, a tax revolt will mean that those guaranteed-income pensions no longer exist. From that perspective, the world my great-grandmother lived in and the one my grandchildren will live in may someday have something in common.
One Big Generation Gap
If folks of my great-grandmother’s generation wanted to even think about retiring, they had to learn to live within their means and save their money. Even people with significant amounts of inherited wealth had to pace their spending if they didn’t want to die as paupers. There was simply no such thing as Social Security, nor anything like it, when they were growing up.
My grandmother lived through the Great Depression, and she never trusted banks – for good reason. As a youngster, I knew that what money she had was hidden in a coffee can in the pantry and under the underwear in her dresser drawer. It was many years before she could bring herself to put money in a bank account. We were not a wealthy family, but my grandmother had managed to save $20,000. That might not sound like much now, but at the time that was about the price of a house.
So, with these two women in mind, I reread the 2013 EBRI Confidence Survey, which offers up some real eye-openers:
- The percentage of workers confident about having enough money for a comfortable retirement is essentially unchanged from the record lows observed in 2011.
- One reason that retirement confidence has remained low may be that some workers are realizing just how much they may need to save each year in order to live comfortably during retirement. One-third think they need to save 20% or less of their total household income, one-fifth put that target at 20%-29%, and nearly one quarter report that they need to save 30% or more.
While the government offers some tax incentives to save through IRAs and 401(k)s, no one is forcing people to live within their means and save their money. In other words, saving for retirement is an option that more people should be taking. Social Security is not going to get the job done. The EBRI had some comments on that subject, too:
- One of the primary vehicles that workers use to save for retirement is an employer-sponsored retirement savings plan, such as a 401(k). Eighty-two percent of eligible workers (38% of all workers) say they participate in such a plan with their current employer, and another 8% of eligible workers report they have money in such a plan, although they are not currently contributing.
- Cost of living and day-to-day expenses head the list of reasons why workers do not contribute (or contribute more) to their employer’s plan, with 41% of eligible workers citing these factors.
The report went on to say that only 10% of those working are contributing the legal maximum to their plan. Excuse me! The government is giving us a tax-deferred opportunity to save money here. If you are in the 25% tax bracket, you would save $2,500 on taxes for every $10,000 you save, and only 10% of those eligible are taking full advantage of this?