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The Dual Reality of Wealth Transfer and Retirement Savings Crisis

As an estimated $84 trillion is set to transfer from older to younger generations, many Americans worry about achieving financial security in their elder years. Wealth inequality has sparked discussions about both a great wealth transfer and a retirement savings crisis. The U.S. economy seems to have divided consumers into groups of haves and have-nots, and retirees are no exception.

The Great Wealth Transfer Underway

Research has identified a significant wealth transfer in progress. Cerulli Associates, a research and consulting firm, estimates that $84 trillion will shift from older to younger generations by 2045. However, experts also highlight a brewing retirement savings crisis for those who have not saved enough for their elder years. Both dynamics are at play, according to Chayce Horton, senior analyst at Cerulli. Horton noted that this wealth transfer will occur on a less-than-widespread basis, with significant wealth concentrated in fewer, older hands.

Beneficiaries of the Wealth Transfer

Much of the wealth transfer—$35.8 trillion or 42%—will come from high-net-worth or ultra-high-net-worth households, representing just 1.5% of all households. High-net-worth households have $5 million or more in investable assets, while ultra-high-net-worth households have $10 million or more. Younger generations likely already benefit from better education and assistance with major purchases like homes, even as they wait to inherit these assets.

Rising Costs and Retirement Struggles

Covering retirement costs has become increasingly challenging, with inflation driving up expenses for health and long-term care. Fidelity estimated in 2023 that a 65-year-old single individual would need about $157,700 for health-care costs in retirement, while an average retired couple would need about $315,000. Horton pointed out that these rising costs mean many people will pass away without leaving any wealth to heirs, contributing to the perception of a retirement savings crisis.

The Growing Concern Over Retirement Savings

The National Institute on Retirement Security found that 79% of Americans believe there is a retirement crisis, up from 67% in 2020. More than half (55%) are concerned they will not achieve financial security in retirement. The average overall 401(k) balance was $125,900 in the first quarter, according to Fidelity Investments, with a total savings rate of 14.2% including employee and employer contributions. However, these figures do not account for the roughly half of Americans without access to workplace retirement savings accounts.

Mandatory Savings Plans as a Solution

Teresa Ghilarducci, a professor of economics at The New School for Social Research, suggests that mandatory savings plans requiring all individuals to participate might be the solution. She emphasized the power of compound interest and the importance of getting people into pension plans early to ensure adequate savings by the end of their working lives. Ed Murphy, president and CEO of financial services provider Empower, added that data supports a forced savings approach. For those earning $35,000 to $50,000 without workplace retirement plans, savings are often non-existent. However, once these individuals have access to workplace savings through payroll deductions, up to 90% will start saving.

The Importance of Workplace Savings

Murphy stressed the necessity of increasing participation in workplace savings plans, calling it the most effective means of ensuring people save for retirement. He pointed out that enabling more people to save through their workplace is crucial for addressing the retirement savings crisis and providing financial security in elder years.

Conclusion: Navigating the Dual Challenges

In summary, the U.S. is experiencing both a great wealth transfer and a potential retirement savings crisis. While a significant amount of wealth is poised to shift to younger generations, many Americans face challenges in securing their financial future. Addressing these issues requires innovative solutions, such as mandatory savings plans and increased access to workplace retirement accounts. By navigating these dual challenges, policymakers and financial institutions can help ensure a more equitable and secure future for all retirees.