← WSJ Your Money Briefing
WSJ Your Money Briefing
Pandemic Extends Retirement Insecurity for Americans
00:09:21
Fewer than expected Americans withdrew from their retirement accounts due to the pandemic, but the portion of households projected to be unable to maintain their standard of living in retirement remains high. Reporter Anne Tergesen explains. J.R. Whalen hosts.
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- [00:01]
A
This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. Listen@schwab.com Washingtonwise.
- [00:20]
B
Here's your money briefing for Wednesday, January 20th. I'm J.R. whalen for the Wall Street Journal. Pandemic relief measures like stimulus checks and loan forbearance have helped a lot of US Households stay afloat and pay their monthly bills. But the long term picture is less rosy. The portion of households that are projected to be unable to maintain their standard of living in retirement continues to creep higher.
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C
One answer is because of the impact of the financial crisis, but there are also long term changes that affect retirement readiness for the population.
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B
Coming up, our retirement reporter Ann Tergeson will review the factors at work affecting Americans retirement finances and discuss why relatively few people last year chose to draw from their retirement accounts to make ends meet. That's after the break.
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A
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- [01:44]
B
Nearly all areas of personal finance were affected by the pandemic in 2020. Among them were Americans ability to save for the future. Ann Tergerson covers retirement for the Wall Street Journal. She's been writing about the struggles people faced in saving for retirement as well as some successes and she joins us now. Ann, thanks for being with us.
- [02:03]
C
You're welcome.
- [02:04]
B
So Ann, how much damage has the recession done to Americans who are trying to build financial security when they retire?
- [02:10]
C
The interesting thing though is that we haven't seen a huge amount of deterioration. So you know, you might expect given the severity of the recession in terms of the change in unemployment rate and other and gdp, you would might expect to see a pretty sharp deterioration, but that was not the case. According to the study by Boston College, their composite index sort of indicated that in 2019, when the economy was doing well, about 49% of Americans were likely to fall short of having enough to maintain their current standard of living in retirement however, now in 2020, that number has increased to 50. So 51% of American households now are at risk of falling short in retirement. So it's not a huge change from 49 to 51. I mean, it is a change, but it's not a huge change.
- [03:02]
B
I guess you could consider that good news considering how much of the economy was shut down. But why do you think those numbers stayed in a fairly narrow band?
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C
I think it has to do with the fact that both the stock market and the housing markets in general overall have held up well. I mean, that doesn't mean that every person who owns stocks didn't experience some losses. It depends on the stocks that you own. If you own like a pretty broadly diversified portfolio of stocks, you probably did pretty well in 2020. And you know, every housing market did not go up in 2020, but in aggregate, the market went up a little bit. So I think that the two main sources of wealth that people pull from in retirement, obviously they pull from Social Security, but aside from that is their 401ks and their home equity. And in both of those pots of money have done held up pretty well in 2020. Obviously, you know, people who experience job losses would be in a different ca and they might be experiencing significantly more financial stress.
- [03:58]
B
But at the same time, we should note that the percentage of households at risk of falling short at retirement has crept higher over the past decade. What factors have contributed to that?
- [04:07]
C
Boston College started doing this in 2004. They sort of assess where the population as a whole stands every three years because they use a set of government data that comes out every three years. So in 2007, the figure was 40%, meaning 40% of American households were at risk of falling short in retirement. Then after the financial crisis, we went from that 40% to about 50%, and it stayed at pretty close to 50% ever since. So the question is why? And you know, one answer is because of the impact of the financial crisis. But there are also long term changes that, that affect retirement readiness for the population. One has to do with Social Security. There's been an increase in the age at which you can claim your full Social Security benefit over time. And it varies by the year that you were born. But it, you know, it used to be that you could claim a full benefit when at a younger age than you can now. So that's one thing. The second is the long term decline in interest rates. That's been really hard on retirees. I mean, it makes it so that for every dollar that you save, the Income that you can derive from that is lower and lower as interest rates have declined. And then at the same time, the population as a whole has also seen increasing longevity. So it's been a real squeeze on retirees and that's reflected in the number being sort of permanently higher, seemingly.
- [05:28]
B
So, you know, we spoke back in the fall about rules in the federal Cares act that allowed Americans to withdraw from their 401 accounts penalty free and how a smaller than expected number of them had taken advantage of that. Where do those numbers settle in at the end of the year?
- [05:42]
C
The year end numbers were pretty consistent with what we were reporting back in the fall, which is that back in the end of September we were seeing kind of like around 5% of people pulling money from their 401ks. This is data from record keeping companies, companies like Fidelity and Vanguard that Keep track of 401k accounts for people. So this is actual like hard data, it's not survey data. So at that point we're seeing numbers in say the 5% range. Now at year end, it's more like in the 6% range. So there wasn't a huge jump at the end of the year. That CARES act provision you mentioned that allows people to take money up to 100,000 from their 401ks or IRAS penalty that only applied in the year 2020. So, you know, I was curious to see whether we'd see kind of a rush at the end of the year of people thinking, okay, this is about to expire. You know, my penalty free access, I'm going to rush in there and just take it right now. But we didn't see that.
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B
But stepping back for a moment, it's worth noting that millions of people don't have a 401k or an IRA.
- [06:47]
C
Yeah, it's interesting. So I mean, you could look at this data, both the fact that, you know, only 6% of people took withdrawals from their 401 s and the fact that, you know, Boston College measure of retirement readiness really didn't show a lot of deterioration. You could point to that and say, well, this recession must not be so bad. And I think that's probably true, but probably only true of a portion of the population, which is the portion of the population that have 401 s tend to have, by and large emerged relatively unscathed. There hasn't been the kind of job loss for that population that you see in the population of people who maybe work for smaller businesses who have lower incomes. And those businesses don't even offer 401ks. So you're not seeing the people who probably needed the most access to emergency cash. Those people didn't have 401 s to withdraw from. So I think to some extent it's a little bit of a tale of two cities in terms of the impact of this recession, which I think by many measures has been a pretty significant recession. But some people have had a lot bigger of an economic shock, more of an economic disruption that they've had to contend with than others.
- [07:58]
B
Has there been any talk of Congress extending the 401 withdrawal rule for 2021?
- [08:02]
C
It's really unclear. I mean, I think there's so many things going on in Washington right now. And I also think that, you know, we have to see how the economy does and if we're seeing the economy kind of falter on many levels, I think there was some deterioration in the jobs picture. So I think, you know, if you start to see the economy kind of going in the wrong direction, I think Congress will have a lot more motivation to do a broader relief package. In which case maybe this CARES provision that allows people to take penalty free withdrawals from their 401ks, maybe that will come back. But it's really hard to know. I mean, even if the economy deteriorates, there may not be much appetite in Congress for feeling like they have to do this particular provision.
- [08:43]
B
And for people who did take advantage of the rule and withdrew from their 401k or their IRA because of the crisis, is there a timetable for them to have to pay that back?
- [08:52]
C
Well, you don't have to pay it back. I mean, essentially Congress said if you want to take the money out, you can take it out. So you take it out and you, you have to pay income tax on that withdrawal just as you would in retirement. But you don't have to pay the 10% early withdrawal penalty if you're younger than 59 and a half. Congress waived that for 2020. So if you want to take the money out and not pay it back, that's your choice, that's your option. If, however, whatever caused you to take the money out was proved to be sort of a short lived problem and you're sort of on the other end of it and you have the money and you would like to pay some or all of it back, you have the option to do so over a three year period. So I believe it's three from the date when you actually took the withdrawal. But you should check that in which people can pay it back if they want to. You pay a kind of a heavy price. When you take an early withdrawal, even if it's a relatively small amount of money or it seems relatively small, that can compound over time. And if you have, you know, a couple decades until retirement, then that can compound over time into something sizable. So Congress is giving you the option, which is very nice, to put the money back.
- [09:59]
B
All right. That's Wall Street Journal reporter Ann Tergeson. Anne, thanks for coming on the show.
- [10:03]
C
You're welcome.
- [10:04]
B
And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.
- [10:08]
A
This podcast is brought to you by reliaQuest. Cybercriminals are constantly attacking. They want your data. They want your identity. They want your innovation. ReliaQuest fortifies your business with agentic defense AI that detects, contains and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. ReliaQuest agentic defense for the enterprise. Learn more at reliaquest.com that's R E L I A Q U E-S-T dot com.