IRAs and the Retirement Income Myth

Update December 2019: The Transamerica Center for Retirement Studies recently released its comprehensive retirement survey of American workers that confirms these findings with even more data. This post was originally published in 2005 and undated in 2006 and 2017.

IRAs are the financial tool that we use to supplement our retirement income, right? Not so, according to industry data. It turns out that most people have no IRA or have too little accumulated in IRAs to be a meaningful source of retirement income. Others at the top end of the financial scale have enough other financial resources that they barely touch their IRAs in retirement. The available research indicates that relatively few people actually use the IRA as intended to provide retirement income.

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 attempted to address this situation. Employers may now automatically enroll employees in a salary-deducted Individual Retirement Account. The law also makes it easier for children to keep money in an IRA that is inherited from parents. Additionally, IRA owners to make charitable donations directly from IRAs. These provisions, if put to wider use, would help make IRAs a more robust tool for retirement savings.

My business Freedom Benefits uses IRAs in conjunction with several types of 401(k) plans to make retirement savings accounts easy for small businesses and their employees.


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