15 ways saving for retirement has changed in the last 50 years

With income growth being largely flat for most Americans and college tuition skyrocketing, many millennials have found it hard to leave the nest. With their parents shouldering their continued expenses, the funds needed to carry adult children must come from somewhere. Retirement savings offer a painful but convenient cushion for many families, with pre-retirees sacrificing future security to pay for today’s bills.

It wasn’t so long ago that the average retirement age was 65 in the U.S. However, the proliferation of private retirement pensions, increased wealth, and improved access to disability income sources have led the median age of retirement to drop. This is happening while longevity is on the rise, creating a reality that a person can expect 10–20 years of retirement or more.

This lowering of the retirement age, however, is not universal. As Americans are living longer, many are opting to continue working into their retirement years. Additionally, as mitigating factors, like increasing tuition for dependent children, wage inequality, and the rollback of public and private pensions persist, the luxury to retire early may be unavailable to many on the lower income brackets.

While the idea that Americans are living longer reflects that the national health is improving, it is creating additional strain on the infrastructure. Safety net programs like Social Security and Medicaid are facing funding crises, while individuals may be forced to save more as they anticipate increased spending in post-retirement years.

The improvements in longevity and the diminishing Social Security fund have not escaped the notice of Congress. In 1983, Congress passed amendments to the Social Security legislation, raising the retirement age from 65 to 67 for retirees born in or after 1960, with early retirement benefits being available at a reduced amount at age 62. Retirees that hold off until 70 to collect will be awarded an additional 8% of their full benefits per year, up to 132% of the benefits they would get at age 67.

Once, pensions were the reward for a life of hard work. Employees that committed to a single company or public service could expect that their retirement would be paid for. Cost-saving schemes, like the 401(k) and mutual funds, gave companies a way to maintain the appearance of offering retirement benefits to their employees while improving profitability. This changed the definition of retirement savings from a work benefit paid by the employer to a work contribution paid by the employee.

The rise of 401(k) plan forced employees to become responsible for their own retirements, which has the potential to be problematic for many reasons. First, if the market is trending down, so is the balance on a 401(k). Yet, to add value to a 401(k), account holders may be forced to invest even when the asset is actively losing money. They’re also investing in a vehicle that may be poorly managed, opaque to the investor or an outside review, or unclear on its investment strategies. Finally, a 401(k) carries complicated tax implications. All of these have forced the average retiree to understand investing, which was not a requirement their parents likely faced. 

Mutual funds are “baskets” of diversified securities—such as stocks, bonds, cash, and precious metals—that are professionally managed. Investors can buy a share of this basket. Since mutual funds are managed, they cease to be tradeable at the end of the trading day. Exchange-traded funds, or ETFs, are index funds that track a market index and change prices once the markets close. As they are passively managed, they can be traded like a stock, and are gaining in popularity.

The switch in popularity from actively managed to passively managed funds can be explained in part due to lower management fees. It can also be attributed to backlash from the Great Recession, when public faith in the financial industry and active managers had been chipped away. Some investors have taken up an attitude that their assets are better served in their own hands, even if that means taking on more risk and responsibility.

If one buys a bond and holds it to maturity, the yield—or the expected return-on-investment for the bond on the secondary market—will not matter. However, if bonds are being purchased as part of a short-term investment goal, then a high-bond yield is important. The current epidemic of low real bond yields means that retirement portfolios will rely less on bonds and more on other investment vehicles, like ETFs.

Another alternative to bonds is stocks. While stock ownership suffered somewhat following the Great Recession, stock ownership increased by nearly 20% among middle-class families from 1989 to 2016. This, however, should not be interpreted to mean that the stock market has become some style of wealth liberator; the St. Louis Federal Reserve estimates that 78% of the stock market wealth held by middle-class families belongs to the top 10% of families by wealth. This is 5 percentage points higher than in 1989.

There was a time when investing meant finding a stockbroker, paying a retainer fee, and relying on that broker to process all trades—usually at a high commission. No-cost and low-cost brokerages break with the fee hegemony by foregoing advising and wealth management services in exchange for low-cost trading. No-cost brokerages do not offer the individual service a full-service broker offers, but for those distrustful of the financial industry, this may be an acceptable trade-off.

With wealth inequality at one of its highest levels in history, it is understandable that savings for the highest brackets and the lowest brackets would look different. It is estimated that only 52% of all Americans have any retirement savings at all. What is less understandable is how race plays into retirement. In 2016, the average white family, for example, has 3.5 times the retirement savings of the average black family and 2.7 times that of the average Latino family.

As stock and ETF ownership increases, the influence that home value has on household wealth has decreased. This may have been influenced by the Great Recession, where the housing bubble caused home values to decrease. For communities that traditionally relied on home ownership as a measure of wealth—such as the black community—the financial dip effectively erased much of their wealth profile.

All of this is happening against a backdrop of rising prescription costs, medical insurance premiums, and hospital fees. The fact that there are more people living longer means that there will be more individuals needing extensive medical care.