IRAs and the retirement income myth

by Tony Novak, CPA, MBA, MT
, revised 11/28/2011

IRAs are the financial tool that we use to supplement our retirement income, right? Not so, according to reliable investment account data.

It turns out that Individual Retirement Accounts are not a significant source of our collective retirement income. The large majority of Americans who really need additional retirement income simply have no significant retirement savings accounts. Retirement savings accounts are so small for the majority of us so that we can say that they do not exist as a source or regular income.

At the other end of the economic scale, a strong argument can be made that many retirement savings accounts are just a tax-shelter for accumulating inter-generational wealth. Those who do have retirement savings accounts usually do not need the income from them, and in fact spend time and money figuring out how to avoid using these accounts for retirement income.

Relatively few Americans, it appears, actually use retirement savings plans as we might expect to supplement their necessary living expenses during retirement.

These figures were reported in a 2005 U.S. News & World Report survey:

• 45% of workers do not believe they will have enough money set aside for a comfortable retirement.
• 41% plan to retire before they reach the age of 65 (but far fewer actually do).
• 31% of workers over age 50 expect Social Security to be the biggest chunk of their retirement income (although this does not provide enough income even for a poverty-level existence).
• 74% of workers plan to work at least part time after retirement, implying, in many cases, that other sources of income are inadequate to meet lifestyle goals.

In contrast, financial advisers notice that among those who actually do commit to a retirement savings program during their working career, few actually need to spend the full amount of the investment income they earn in their retirement years. Most retirement savings accounts have a higher balance at the death of the owner than on the date of retirement! Financial advisers make a good living teaching people how to avoid taking income from their retirement savings accounts. This observation highlights the differences between the “haves” and “have nots” and underscores the overall snowballing effect of adopting solid financial habits over a lifetime.

The Pension Protection Act of 2006 attempt to address these two extremes. Employers will now be able to automatically enroll employees in a salary-deducted Individual Retirement Account (IRA) and the law makes it easier for children to keep money in an IRA that is inherited from parents. The law also allows affluent IRA owners to make charitable donations from IRAs. Whether these measures will help address the financial polarization issue remains to be seen.

Opinions expressed are the solely those of the author and do not represent the position of any other person, company or entity mentioned in the article. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Tony Novak operates as an independent adviser under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator" but is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.

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