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Most retirees are forced to leave their jobs without sufficient savings for retirement. Teresa Ghilarducci, a labor economist who specializes in retirement security and has extensive experience with retirement planning, believes that while some experts may think working more hours will help people save for retirement they are probably not the best solution.
She advocates changing the current system of retirement savings in order to increase access. A bill introduced to Congress called the Retirement Savings For Americans Act is one example. The RSAA will automatically enroll employees without access to a work-place retirement plan in a retirement savings account. Workers with low and medium incomes would get a matching tax credit as well as a matching payment.
Investopedia interviewed Ghilarducci to learn what, in her opinion, needs to be changed about the U.S. Retirement System and to find out how to save for your retirement.
An edited excerpt from the conversation:
INVESTOPEDIA Why must people work longer than expected or postpone retirement?
TERESA GHILARDUCCI TERESA GHILARDUCCI TERESA GHILARDUCCI TERESA GHILARDUCC: It’s a tale about two Americas. I estimate that 12% of the people aged between 62 to 70 continue working because they are passionate about their work. But the majority of people who are working, between 62 and 70 are doing it because they don't have enough money to retire and maintain their living standards.
There's another whole group we have to worry about, people who can't work longer and don't have enough money to retire on.
INVESTOPEDIA : Do you think that working longer would be an effective solution for the retirement crisis in America?
TERESA GHILARDUCCI: So, I agreed before that working longer was a good thing because we wouldn't have to spend taxpayer money or raise savings rates. People could just work longer, and that's good for the worker and it's good for the economy. But over time, as I did more research, I found that those three big myths weren't true.
First of all, working longer isn’t the best solution because most people can’t choose to work longer—a better solution is to help people save for retirement and expand Social Security and fully fund it.
Second myth: Work is good for you. My research showed that work was good for the types of people who make pension policies, like politicians and professors. They have high-status jobs where they are able to control their pace and the content of their job. The data show that those who do not have higher levels of stress and cortisol. Most people’s jobs don’t offer meaning, personal growth, or satisfaction.
Last myth: working longer is good for your economy, because it adds more workers. You won’t gain productivity if you add workers who are losing productivity and don’t fully hire younger people. Our GDP would be higher if we employed seven-year-olds, but the wealth of our economy isn’t just determined by our output. It’s also determined by our quality. Saying people should be working longer is a way to undermine the characteristics of a healthy economy.
INVESTOPEDIA Is there a solution to some of the U.S. pension system’s problems?
TERESA GHILARDUCCI TERESA GHILARDUCCI – Half the workers don’t even have a 401K or pension plan. They have no means to invest for their retirement. This is a group of temporary and self-employed employees who are Uber or freelancers.
It is important to offer the option for workers to contribute automatically into a retirement plan. It’s for this reason that I support a Bill in Congress. [RSAA]Kevin Hassett’s and my research led to this discovery.
INVESTOPEDIA INVESTOPEDIA is the most effective way for people to prepare for retirement while they wait for Congress’ action.
TERESA GHILARDUCCI : Saving 3% to 4% from your salary for the rest your life will help you maintain a high standard of living. This is in addition to Social Security. If you compound that 3%, it will allow you to replace 45% to 50 % of your current income.
If you start when you're 40, you have to save 10%. You must save half of your salary by the time you reach your mid-50s.
What are the signs that you’re in the right direction? In your retirement savings account, you want to have 10x the amount of your salary. You want to save 1x the salary you earn if you are 30. In your 40s you should be able to earn roughly four times your current salary.
You can use the same rules. When you're younger, have more in stocks than in bonds. You can then move your money to bonds as you grow older. If you follow a 60/40 portfolio with low fees and you don't take it out, you might not maximize your returns, but you’ll do pretty well.
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