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Valerie Johnson
Wayne and Debi Johnson of Millcreek, Utah, look over his woodworking project on April 17, 2017.

MILLCREEK — Wayne Johnson thinks he and his wife, Debi, have saved enough for retirement to make it to at least age 85 — as long as he doesn’t retire early.

Early in his career as an electrical engineer, he wasn’t thinking much about retirement. His planning consisted only of “don’t go into debt.” So he and his wife Debi didn’t, but that wasn't exactly a comprehensive plan, he jokes.

Debi and Wayne Johnson of Millcreek, Utah, record expenses in their budget as they discuss their finances on April 17, 2017. | Valerie Johnson

He was, however, attracted to the notion that if he contributed a little to a 401(k) account, his boss would match it. Ditto at Debi’s job. “That’s just free money. We signed up,” said Johnson, a practical guy who wears jeans and sneakers and polo shirts that bear the name of his current company or a previous employer. “We started putting in enough to get the maximum match.”

And that was how the couple marched toward retirement for years. They had no idea how much money they’d actually need to maintain an adequate standard of living or what they’d have accumulated when it came time to retire or even when that might be. “We never really sat down and figured it out,” he said recently.

They live a simple, thrifty life on a middle-class residential street in a brick house built in 1956. They added on to the back of it 19 years ago when they couldn't find an affordable house they liked in a neighborhood they wanted to live. They pay cash for cars and drive them until they drop. It wouldn't occur to them to hire someone to do their yardwork.

The Johnsons are part of a generational wave approaching retirement who will have to rely heavily on their own money saved in a 401(k) — if any — and Social Security, rather than a defined-contribution pension plan. Experts say most people in that position won't have enough to support themselves without drastically reducing their lifestyle or extending their work life by years.

Retirement felt far away when Johnson was in his late 30s but seems to loom now that he’s 58. With no pension and nearly perpetual talk about whether Social Security will last, Johnson has for some time been tackling retirement saving in earnest. He contributes as much as he can into his 401(k) — more than would be typically allowed, except he’s in the over-50 catch-up age category, which allows for extra contributions.

Wayne and Debi Johnson of Millcreek, Utah, look over his woodworking project on April 17, 2017. | Valerie Johnson

Occasionally, Johnson ponders genetic probability that he’ll outlive his retirement funds. He keeps a mental tally of the ages various relatives reached, but it’s really hard to predict how long his own retirement will be. “We’ve gone early, and we’ve gone really late,” he said, noting aunts and an uncle who were going strong in their 90s. “Part of our family history indicates (funding to) 85 isn’t a bad place to be,” he says.

Regardless, he’s better off than the bulk of Americans. The average saving dedicated specifically to retirement for those in their 40s and 50s is reportedly an entirely inadequate $14,500.

Vulnerability over time

Understanding why what lies ahead for retirees is sparking national discussion and requires a look back to life when pensions were common, Social Security was really a short-term safety net and folks didn't live long enough to worry about it.

When Social Security was established in 1935 and the age one could leave work and collect benefits was set at 65, the numbers didn't favor a robust retirement: A man born that year had a life expectancy of just 60, a woman 64. Fewer than 1 percent of the U.S. population were older than 65, compared to today's nearly 1 in 5. So the support provided by Social Security was expected to be short but important, as roughly half of those over 65 at the time lived in poverty.

A lot has changed, starting with the average life expectancy, now close to 80 years. The period one collects Social Security is likely to be much longer than was originally anticipated.

People used to plan on a 15- to 20-year retirement, says Chad Waddoups, vice president of wealth management at Mountain America Credit Union. Now retirement can last 25 to 40 years. “Longevity is wonderful if you are healthy and have enough money to survive,” Waddoups says. “But if you’re out of money at 82 and still healthy, it’s a tough thing to manage.”

The other big change is a move away from pensions. Just 30 years ago, pensions were a “critical instrument of personnel policy” in big corporations and state governments, says research economist Steven Sass, program director at the Center for Retirement Research at Boston College, who is an author and noted expert on retirement financing and pensions. Pensions helped companies retain employees — “and get rid of them at the right time, too, with built-in incentives both to stay and to leave," Sass adds.

But around the year 2000, companies in financial crisis found that regulations to protect pension funds were hard on companies with unpredictable or rocky finances. They were required to set aside money so they would have enough to pay promised pensions, regardless of how that impacted other aspects of company finances.

EPI analysis of Survey of Consumer Finance data, 2013 | Aaron Thorup, EPI analysis of Survey of Consumer Finance data, 2013

Many employers decided they'd rather drop the "defined contribution" of pension plans and they have been phasing pensions out for new hires ever since. Roughly 4 in 10 workers still have pensions earned in careers spanning decades, but the number is shrinking, and most younger employees and certainly new hires are unlikely to see one.

It was against that backdrop that the 401(k) came into being, although it wasn't intended to replace pensions. Ted Benna, the guy who thought up the savings plan, has said in various interviews that he never envisioned it would become the way companies contribute to a worker's retirement.

The Economic Policy Institute's 2016 “State of American Retirement” report calls the 401(k) “an accident of history” and tells the story this way: In 1980, Benna, a benefits consultant for a bank, was asked to redo his employer's cash bonus plan. He'd been reading the tax codes and thought he saw an opportunity in a provision that allowed employers to offset the costs of matching an employee's savings contribution.

He expected his idea to be an extra benefit, but employers soon started using it in place of a pension, matching a percentage of the money an employee put into retirement savings. Neither Congress nor Benna expected 401(k)s to largely replace the pension, but that has happened over time.

EPI analysis of Survey of Consumer Finance data, 2013| Aaron Thorup, EPI analysis of Survey of Consumer Finance data, 2013

Today, the 401(k) plan offered by many employers is, when paired with Social Security and IRA savings, the mainstay of most peoples’ retirement. And a great many people have only the Social Security part of this three-legged stool on which to perch. EPI, a nonprofit think tank that looks at economic trends and how policies affect working folks, says moving to retirements built largely around the 401(k) has created greater vulnerability to economic downturns and other problems.

Americans are worried

Planning for retirement falls on the individual worker and family, nearly half of whom have no retirement savings at all. “That makes median (50th percentile) values low for all age groups, ranging (in 2013) from $480 for families in their mid-30s to $17,000 for families approaching retirement," the EPI report says.

Lately, the percentage of workers age 32-61 participating in any retirement plan has dropped to just 53 percent, EPI notes.

Americans know it’s a problem; it's a rare example of accord in a politically divided era. The National Institute on Retirement Security a month ago released a poll showing that Democrats and Republicans are both worried about their economic security in retirement. Among findings of the survey, “77 percent agree the disappearance of pensions is killing the American dream,” while 71 percent liked pensions better than 401(k)s for delivering retirement security.

A whopping 88 percent of those polled said America has a retirement crisis. They worry about whether Social Security will be around when they retire and how much they can count on receiving.

The institute projects that by 2050, 25 million American retirees will live in poverty or at least be at high risk of it. Fidelity Investments says that 55 percent of Americans may not be able to cover basic expenses like housing, food and medical care when they retire — which is actually very similar to what prompted Social Security in the 1930s.

Americans have not proved to be particularly good savers. Nearly half in a 2015 Federal Reserve Survey said they would not be able to cover a $400 emergency tomorrow without selling something or borrowing money.

A 'powerful' solution

Retirement is a problem that should be faced head on, but figured backward, says Waddoups. People should figure out what they’ll need to live on and then work backward from there to save it. “A rough rule of thumb is you need about 75 percent of the income you have while working.”

People typically can live on the reduced income because they are no longer paying Social Security retirement payroll tax, they’re not saving for retirement and the mortgage is or will soon be gone — hopefully. “We strongly encourage people to pay those things off before they retire,” he notes. Individuals will need a little more or a little less, but it’s a rough number everyone should know.

The next step is knowing how to maximize monthly income. “The other number everybody should know is how much more your monthly Social Security benefits will be if you retire at 70, as opposed to 62,” says Sass.

The Social Security Administration says 41 percent of women and 36 percent of men start taking their benefits early, at age 62, compared to 3 percent of women and 2 percent of men who start getting benefits at age 70 or older.

The difference in monthly benefits between those ages is staggering, at close to 75 percent more at age 70 than one would receive at 62. For each year one delays claiming Social Security, the payment increases 8 percent. “Working longer and claiming later is the most powerful thing that people can do,” says Sass, who adds that it's a similar difference in 401(k) savings, too. The reason is simple. You contribute an extra eight years. And you have eight fewer years you have to live on the assets.

What people actually need to survive is a “huge variable” that depends on debt and lifestyle, assets and more, Waddoups says. Some people need $10,000 a month, others $1,000. Someone who has saved a million dollars is likely to be fine if he can live on $35,000 a year, but if it’s going to take $80,000 a year to survive, that’s problematic, he says.

Someone who doesn't get serious about retirement savings and planning until age 60 won’t have as many options to avoid poverty, but they can downsize, work far longer, sell assets or liquidate home equity, perhaps in a reverse mortgage.

Waddoups emphasizes that a worker who creates a plan at 35 and starts saving will have lots of options. “Even if you start small, projections say you’ll have a successful retirement. So start early and be disciplined."

For a financially comfortable retirement, experts like Sass recommend downsizing not just your house — “for most, the biggest expense and largest asset”— but also moving to a more sustainable standard of living. “As they approach retirement, I tell people you’re not going to save your way out of much." Still, he says, money set aside that earns a moderate rate, combined with reduced expenses, can make a big difference in livability.

Other ideas

A few experts are floating retirement plans they say would make sound national policy, like a pair of researchers at the New School Retirement Equity Lab at the Schwartz Center for Economic Research in New York. They released a white paper in 2016 proposing “A Comprehensive Plan to Confront the Retirement Savings Crisis." Teresa Ghilarducci and Hamilton “Tony” James suggest "Guaranteed Retirement Accounts” could be mandatory “but cost-neutral for almost all below-median-income employees.” It accomplishes that by providing a $600 tax credit for workers earning up to $40,000 a year.

The GRA personal savings plans create individual retirement accounts and would use existing government infrastructure, they wrote. But it’s not another type of Social Security, and the government would not have access to the money. Instead, workers would buy their own annuity with accumulated savings under the plan.

The plan would also invest in longer-term, higher yield vehicles, the plan authors say — a nod to a common lament about 401(k) plans, which are designed to be accessed in a pinch (with a tax penalty below age 59 1/2). Because 401(k)s are short-term investments, they yield lower returns.

The proposal for GRAs has gotten a decent amount of press but not much action. To work as envisioned, Congress would likely have to pass legislation.

The TransAmerica Center for Retirement Studies offers suggestions specifically to help people who are self-employed prepare for retirement, but it's solid advice for anyone: Save early and consistently, and allow yourself plenty of years to accumulate some wealth. The group notes that many local chambers of commerce or trade associations teach about different savings vehicles.

The center also points out that while some people might be tempted to underreport income to reduce their income taxes, “it’s important to remember this can reduce retirement benefits, as they are often based on an individual’s earning history.”

Automated savings makes the accumulation of wealth more effortless and likely, but create a plan B in case something comes up, the center says.

Wayne and Debi Johnson of Millcreek, Utah, look over his woodworking project on April 17, 2017. | Valerie Johnson

Johnson wishes he and his wife had started a bit earlier setting money aside for retirement. But by staying out of debt, living comfortably but within their means and saving consistently, he figures they are as ready as they can be.

And they are miles ahead of most Americans.

Helpful resources:

Squaredaway.bc.edu, put together by the Financial Security Project at Boston College, has a killer retirement calculator.

The Social Security Administration offers a series of calculators to help people estimate what that part of retirement will be like.