BPC researchers suggest in a new white paper that the retirement planning challenges U.S. workers face are more complicated and varied than is commonly admitted. Professionals involved in the retirement planning industry generally understand that workers in the U.S. need to save more of their annual earnings to ensure successful retirement outcomes, but there is less concern about the specific factors that prevent workers from saving more, according to BPC.

Even the retirement plan sponsors and advisers who make a living worrying about retirement planning issues tend to oversimplify the particular challenges faced by workers and retirement plan participants, BPC claims, often lumping individuals into imprecise groups and offering less-than-optimal support.

When evaluating the retirement security landscape, complexity is the one constant. Potential sources of retirement income are numerous and varied, BPC observes, including continued work (perhaps on a part-time basis), Social Security benefits, drawdown of personal savings, distributions from workplace retirement plans, annuities, home equity and financial support from family members, among others. Understanding this patchwork and building a solid foundation upon which to retire is no easy task for the “average” American, BPC notes.

Additionally, even for those who do accumulate substantial financial resources for retirement, income needs and living standards are different for each retiree. The nest egg is also subject to a variety of risks depending on the particular individual, BPC states, such as poor investment choices, sequence of return risks, unexpected medical bills, economic downturns and the possibility of needing expensive long-term care.

All of this complexity makes the holistic U.S. retirement landscape difficult to understand for pretty much everyone involved, from the financial advisers and service providers to the individual savers. As BPC explains, the state of any particular retiree’s finances depends heavily on his sources of income, how much money he has, which assets he holds and what life events occur that could drain the nest egg.

In its paper, BPC uses several theoretical participant personas to demonstrate the variable challenges individuals face at different points in their careers—and depending on which industry and job function they occupy. The four types of retirement savers include one covered by a private-sector defined benefit (DB) pension; a second with no access to a retirement plan at work; a third that has access to defined contribution (DC) retirement plans at work but, for a variety of reasons, is not contributing much and is likely to quickly exhaust his savings in retirement; and, finally, a family that is contributing a substantial portion of its income to workplace and personal retirement accounts but is unprotected against unforeseen expenses.

The first example is an individual who is 35 years old, divorced and makes $30,000 a year as a machine operator in a unionized manufacturing plant. As BPC explains, this individual is likely to be covered by a defined benefit plan that would replace at least a portion of his terminal salary in retirement. Between his pension income and Social Security benefits, his retirement can even be expected to be comfortable, BPC says, if all goes well.

Risks for this individual include not remaining employed with the company long enough for his pension benefits to vest; the plan could be frozen before large, late-career benefit accruals; or the plan could fail entirely, perhaps because it was underfunded and the company went out of business. This would be especially problematic for such an individual if the pension insurance provided by the Pension Benefit Guaranty Corp. (PBDC), for whatever reason, did not cover the full benefit. Another risk to this individual would be the short-term appeal of taking a lump-sum distribution rather than an annuity, should such an option be presented.

The next participant persona analyzed by BPC faces a far more dire outlook as a 39-year-old single mother making $20,000 annually between two part-time jobs as a waitress and call center operator. She does not have access to a retirement plan at either job, and her low income makes it challenging to save. On her current path, Social Security would be the only significant source of income in retirement.

Would the federal benefit be enough? Unlikely, according to BPC. Her Social Security benefit at full retirement age (67 for her) would replace only about three-fifths of her pre-retirement income, meaning a substantial drop in standard of living could be likely. And if she spends significant time unemployed or claims Social Security as soon as she can (at age 62), she would get an even smaller benefit, possibly leaving her under the poverty line in retirement. Further, this individual would probably not ever be able to purchase a home, and so would have to continue paying rent throughout her retirement and would not be able to rely on home equity for any retirement income.

Next, BPC considers a family of two married adults, ages 42 and 37, both working full time in mid-level professional jobs and pulling in a combined $85,000 per year. One’s workplace offers a 401(k) plan, to which the individual contributes 3% of salary with an employer match of 1.5%. The other’s workplace 401(k) does not offer a match, and the individual does not contribute.

The primary risk to this couple is that the lackluster retirement plan participation will continue, BPC says. If this couple does not increase contribution rates during their working years, their personal savings would be quickly depleted in retirement, leaving them to live on Social Security benefits alone, which would likely provide less than half of pre-retirement income. Leakage from the retirement accounts, perhaps from a 401(k) loan or an early cash distribution following a job change, is another major risk for this couple.

Finally, BPC examines an older and well-established couple, both 47, working in higher-level professional jobs with a combined annual income of $170,000. They both participate in 401(k) plans at work, each saving 12% of salary, including employer contributions.

As BPC observes, this couple would likely be considered fully “on track” for retirement by their plan sponsor or financial adviser. However, BPC notes that it is critical for this couple to use their more significant means to max out contributions to the 401(k), and they should also consider establishing a supplemental individual retirement account (IRA) around age 50. By the time they retire, the couple would have a large nest egg and, if all goes well, would have a financially comfortable retirement.

Still, BPC points out, the risks of poor investment choices or investments with high fees could sap the growth of their savings. Furthermore, if they do not purchase a lifetime annuity and if they are not careful to assess their lifetime income needs, they could outlive even their substantial savings. Should that occur, they would need to live on their Social Security benefits alone, which would provide only about a quarter of their pre-retirement income. 

Another challenge that applies across all the archetypes: Many individuals will need highly expensive long-term care to help with activities of daily living in retirement. A significant, extended need for long-term care could put strain even the most successful retirement savers, BPC warns.

A full copy of BPC’s white paper, “A Diversity of Risks: The Challenges of Retirement Preparedness in America,” as well as an explanatory infographic, are available for download here. BPC says this paper is the first in a series being prepared by its staffers in advance of pending recommendations for policymakers “to improve the financial security of Americans preparing for and in retirement.”