Are we in crisis? The answer is yes — but according to Harvard professor David Laibson, there are some relatively simple solutions if people are willing to act. If people started saving in their 401(k)s at age 22 at 6% with a 100% match, assuming a 6.5% return, Laibson says, there would be a 103% replacement ratio for someone earning $35,000 (and increasing 1% per year) if 50% comes from Social Security.
The problem is that people start saving at 30, the match is closer to 50% and returns are expected to be lower, as will be Social Security benefits, reducing the replacement ratio to 53%. Leakage is also a problem with $1 coming out of the system for every $2 going in — not including withdrawals in retirement.
Laibson suggests simple solutions like annual auto re-enrollment (maybe into professionally managed investments?) for those who don’t participate or have low savings, and auto-deferrals at 6%— which he calls the “new 3%” — plus an increased match. The problem is that even though most people have good intentions, 97% tend to procrastinate when it comes to doing the right thing.
