Are you Prepared for Your ‘Second Fifty’ of Life?

 

Balancing on a pogo stick

We wonks often use the analogy of a three-legged stool to describe America’s retirement system. The three legs are Social Security, pensions, and savings, and if all of them are equally sturdy, the stool can support most of us throughout our retirement years.

Unfortunately, in America today, all three legs are either wobbly or collapsing completely. Traditional pensions — fixed benefits that employees receive in a monthly paycheck for life following retirement — are becoming exceedingly rare: more than 2 in 3 workers born in the 1920s through the ’40s had pensions, but fewer than 1 in 10 workers born in the mid-1960s have one, and that number keeps falling. As traditional pensions have declined, 401(k) and other employer-sponsored retirement savings accounts have grown. These accounts are different in that employees (and sometimes employers) pay into them over time, the accounts fluctuate with their investments, and an employee can draw down the funds in retirement. However, these plans are far from universal. Roughly half of American workers don’t have an easy way to save for retirement through their paycheck. Even many who have saved find their balances too low to provide them with meaningful resources to cover the decades after they stop working. In all, about 1 in 5 Americans over 65 are completely without two of the three legs, living solely on Social Security. For them, it is like trying to get through the second fifty on a pogo stick.

Fortunately, Social Security protects almost all of us. Over 97 percent of people aged 60 and over are either getting benefits or will be at a later date. Without this monthly income, millions of older Americans would be living in poverty. But life is hardly cushy if you are living on Social Security income alone: the average monthly retirement check in 2022 was $1,670, barely enough to pay the average rent on an unfurnished apartment. That leaves little for food, clothing, medicine, and other necessities.

This financial shortfall is one reason employment is rising for people in their 60s, 70s and even beyond. Ironically, work has become an important fourth leg of the retirement stool. Earning even a little income can make all the difference in ensuring the bills don’t pile up.

Terry, who works as a cashier in the cafeteria at Howard University in Washington, D.C., is an example of someone in this situation. Terry’s husband died in 2022. Continuing to work has been good for her mental health. She told me the students treat her like family, and she took great pleasure in describing Taco Tuesday and Soul Food Day, when the lines snake out the cafeteria door. But money is another factor. She gets her husband’s pension — he was an electrician for 35 years — as well as the Social Security widow’s benefit. She even has a side gig selling fresh homemade juice. She has saved a little money toward her retirement, first through a 401(k), then through an Individual Retirement Account (IRA). But working allows her to pay her bills and do things she enjoys, like traveling to see her children and grandchildren. “I repeat this to all the kids,” she told me. “Please do not depend on Social Security, because it’s definitely not enough. Everybody thinks, As soon as I retire, I can fall back on it. But it won’t even get you started unless you have a 401(k) or something.”

Terry is planning to retire next year. She’s in good health, but she’s feeling the wear and tear of years of work. “I’ve been in the kitchen, lifting, bending, cleaning, standing, sometimes for eight or nine hours or doing overtime.” A lot of older members of her family, including her mother, have had dementia, and most of her husband’s friends did not live to enjoy their retirement. Terry wants to enjoy hers while she is still healthy.

Like many Americans, Terry is perched on a four-legged stool that includes work. To understand how some people find themselves needing to work in later life, we have to take a closer look at the other three legs of the stool.

 

The end of the poorhouse

Social Security is one of our country’s greatest legislative achievement. Today 66 million people, roughly 1 in 5 Americans, receive some kind of Social Security benefit, including the 52 million who receive retirement benefits and almost 6 million people of all ages who get monthly survivor payments. Despite this widespread dependence on the program, there is a disconnect between how younger people view it and the reality facing older people today. In the SHOL survey, more than one-third of those under 40 said they do not expect to rely on Social Security when they retire (planning to live largely off retirement plan savings), while over 9 in 10 older people over 70 surveyed do rely on it. This underestimation is worrying. It means that many young people either don’t understand the realities of retirement finances or don’t have faith that Social Security is going to be there for them when they need it. A lack of understanding about how the program works also undermines public support for Social Security, leaving it more vulnerable to cuts.

Our growing older population means that the Social Security leg of the retirement stool needs to be updated or it will fail to provide what people expect, and need, in retirement. Founded in 1935, the program has undergone many changes throughout its history, and its longevity is a testament to the care with which President Franklin D. Roosevelt’s panel addressed the basic financial needs of aging Americans and the best ways to provide for them. The other legs of the stool — pension benefits and savings — developed purely by accident, which helps to explain why they’re wobbling.

 

Whatever happened to pensions?

Traditional pensions are known as “defined benefits.” Employers contribute to a fund from which their longtime employees — and sometimes the employees’ spouses — receive a specified monthly payment after retiring, the amount of which is based on the employee’s salary and years with the company. The plan, which usually requires that employees stay with their employer full time for several decades, fit the mid-20th-century model of people working their way up the ladder within a single company until they retired. If the job is part time or a worker doesn’t stay with the employer long enough, they won’t qualify to receive retirement checks. But careers are often unpredictable. The average boomer held 12 jobs by the time they reached their mid-50s.

Defined benefit pensions also depend on corporate stability. In the mid-1970s, Congress enacted stricter funding requirements and safeguards. It also created the Pension Benefit Guarantee Corporation to protect retirees when firms went bankrupt. But no law requires companies to provide retirement benefits, and traditional pension plans in the 21st century have been losing favor with corporate America, especially after companies were required to show the plans as liabilities on their balance sheets. As recently as 1991, more than 100,000 companies offered these private employer plans, but by 2018 that number had plunged by half. Many of the plans surviving today are closed to new employees. Today, the small number of workers who receive traditional pensions are likely union members or federal and state employees such as teachers, police, and firefighters. The decline in traditional pensions is one element of what has been called the “great risk shift.” The last 40 years have seen a transfer of financial risk — including the risk of poverty for older people — from government and business to individuals. As traditional pension plans disappear, it becomes all the more important that we strengthen the other two legs of the stool: Social Security and savings.

 

Is there a secret to saving?

The people who save the most acorns aren’t necessarily more disciplined or skillful at saving. Sometimes they just have access to more bountiful trees. Our ability to save generally depends on where we work, at what level, and whether we have any money left to put aside at the end of the month, once we’ve paid our bills.

Given how hard many of us find saving, I asked retirement expert Anne Lester, the former head of retirement solutions for J.P. Morgan Asset Management, for her thoughts. She said many of us approach the task of saving with feelings of shame and self-blame, convinced that we should know how to do it or that we’re doing it all wrong.

Anne told me she used to be a terrible saver herself, and that part of figuring out how to save is understanding that “it isn’t just about willpower. If you’re struggling, it isn’t your fault. You can take the judgment out of the picture and say, ‘OK. How do I hack my brain? How do I set up environmental cues?’ ”

The most important thing we can do, Anne advised, is to have money automatically deducted before it hits our checking account, so we don’t even see it. She also recommended using different buckets for specific priorities, like having a separate emergency savings account in a separate bank, so that it takes that little bit of extra work to access the funds. Finally, she said we should think about our needs in terms of a hierarchy, and make sure we have made distinctions between real emergencies, things we need, things we only think we need, and things we simply want. For a lot of us, DIY retirement planning is hard because it requires us to understand financial systems, invest on a regular basis, and have money to put aside that we can afford not to touch for decades. The last of these is particularly difficult.

Social Security was never intended to be our only source of income in retirement, so many of us try to supplement it with savings. The challenge, though, is that we must make these savings last right through to our dying day. The fear of running out can cause its own problems. Sometimes retirees live well below their means because they’re afraid of tapping into their savings — preserving them for an emergency that may never happen. It isn’t just rewarding experiences and pleasures they might miss out on; some skimp on essentials such as medical care.

So how do we decide what a reasonable amount of caution is? This was the conversation I had with my husband’s uncle Barry. Barry was in his 60s then, living in New Jersey and still working hard as a salesman but getting tired of the long days of travel. He had set money aside for retirement but wasn’t sure if it was enough. One day he said to me, “How much money can I take out of my retirement account each month and not run out?”

Because of my job, people often ask me for advice, but I had to admit I had no clue.

Anne explained to me the simple calculation she uses to estimate how much someone can afford to withdraw once they have retired. Her rule of thumb is much easier math than the sophisticated methods of calculation she helped develop in her career. She told me to imagine that I would retire at 65 and would live to be 105, leaving me 40 years to cover. Then she said I should take my current savings and divide by 40. That’s roughly how much I could spend out of my account that year. In each subsequent year, I should redo the math by dividing my savings by 39 at age 66, 38 at age 67, and so on.

“There is no right answer,” Anne said, “because you don’t know what the markets are going to do, you don’t know when you’re going to die. So forget perfect. This is good enough. And it’s giving you some wiggle room. Because you probably won’t live until you’re 105, and you probably will get some returns on your money — and those returns that you’re not calculating into your spending pool will then be there when you break your hip and you need more money.”

 

Touching the third rail

The question on most of our minds is: Will Social Security still be there when I need it? Our growing concerns are partly a result of Social Security’s pay-as-you-go design, which presumes that each generation will pay at least as much into the system as is being paid out. That worked well during the early years of the program, when there were fewer beneficiaries and lots of workers paying taxes. During the peak working years of the boomer generation, huge surpluses were built up in Social Security’s trust funds, but as that generation retires, those surpluses are being depleted. And with increased longevity, many retirees are collecting more years of benefits than their parents did.

Factor in declining birth rates, which means fewer younger people entering the workforce, and you get a balance of payments tilted increasingly in the wrong direction.

All this explains why some people inaccurately claim that Social Security is “going bankrupt.” Convincing Americans that Social Security is doomed — as some who want to make major cuts to it try to do — is one way of eroding public support for this essential program. Social Security can’t go bankrupt, since contributions are constantly flowing into the coffers from America’s workers. But because the system is required to pay for itself, if the reserves in the trust funds run out and nothing is done to reverse the imbalance, our benefits will — by law — have to be cut or delayed. These cuts would impact not just new or future retirees but everyone receiving retirement or disability payments, no matter how desperately they need the benefits.

Yet for all the challenges it faces, and all our uncertainty about exactly what it will look like in the future, Social Security will be there for you! I say that with confidence for two reasons. The first is that even if we do nothing, enough money is still going into the system to pay about 75 percent of promised benefits for the rest of the century. The second reason comes down to politics. Over the past century, popular support for Social Security has grown so strong that the program is commonly referred to in Washington as “the third rail” — a reference to the metal track supplying electric current to trains that can be deadly if touched. In other words, cutting Social Security would be political suicide. Social Security will endure because it’s just too important to too many people. That said, as things stand now, unless we update the program, benefits will be cut by 20 percent in 2034. If that were to happen, I’m pretty sure protests would break out across America. Fortunately, every politician in Washington knows this.

In many ways, we still have a broken system. In just over a decade, if no changes are made, Social Security won’t be able to pay full benefits. And far too many people are reaching retirement with nothing saved and no pension. This frustrates me immensely, because a better system would help millions of people have a happier and more secure second fifty, with fewer financial worries and more personal choices.

At the height of the Great Depression, our leaders came together to create Social Security, which has helped generations of people retire with dignity. The sooner our policymakers put Social Security on more solid financial ground, the better for us all. But long-term solvency shouldn’t be the only goal. People today are working in a very different world than the creators of Social Security saw in the 1930s. We have to update the program, along with our pensions and savings programs, to meet the demands of the 21st century — for all Americans, but especially for those who need them the most.

This article is adapted with permission from AARP’s The Second Fifty: Answers to the 7 Big Questions of Midlife and Beyond, by Debra Whitman (W.W. Norton & Company, September 2024), a guide to aging well in a changing America. One hundred percent of AARP’s royalties from the sale of this book support the charitable work of AARP Foundation.

Find The ­Second Fifty at aarp.org/Bulletin50 or wherever books are sold.