You must have heard about the “Great Resignation.” It’s a phrase coined after an estimated 47 million people voluntarily left their jobs in 2020-2021.1
But have you heard about the potential for a $1 trillion retirement crisis? Probably not.
Those millions of Americans didn’t just stop going to work — they also could have stopped saving for retirement. Hence the potential crisis. Let’s apply broad assumptions in order to demonstrate the impact: If all those workers were contributing the $20,500 annual max to their 401(k) plans and stopped saving for just one year, it would equal nearly $1 trillion in retirement savings lost. And that isn’t counting the match offered in some employer-based retirement plans. It also doesn’t take into consideration that 1 in 5 workers who resigned cashed out their 401(k)s,2 a move that could create an even bigger savings hurdle to overcome.
$963,500,000,000 in lost retirement savings in just one year 3
Those of us who work in the retirement field need to reflect on what lies ahead. We know that when workers stop contributing to their retirement savings — even for just a few years — it can be difficult, if not impossible, to catch up. Not only do they lose the absolute value of their savings, they also experience a shortfall based on a loss of compounding over time.
How much retirement savings could be lost?
Consider four workers who start contributing to their 401(k) accounts at age 22 but stop at different ages. Worker A, who contributes all the way to retirement, saves $4.6 million more than worker B who stops contributing at age 25.
What lost years of saving could mean for retirement
If workers leave a retirement plan and pause for just a few years, the missed 401(k) contributions can have a significant impact. Those lost savings can snowball over time due to loss in the absolute savings and loss in compound growth.
How much is $1 trillion, anyway?
The Great Resignation has the potential of creating a $1 trillion retirement crisis in just a year’s time — and that crisis could very likely worsen the longer people stop saving for retirement. But the millions of Americans who resigned from their jobs last year and no longer have access to an employer-sponsored plan still have options that can help maximize their retirement savings. As content creators and content marketers, we need to heighten awareness of the options available, such as Individual 401(k)s, also called solo 401(k)s, which allow workers to contribute to a Traditional 401(k) plan if they’re self-employed or the owner of a business with no employees. Simplified Employee Pension Plans (SEP-IRA) also let self-employed workers contribute to a traditional IRA. Both accounts help workers to harness the power of compounding while their earnings grow tax-deferred until retirement.
No one can stop a potential crisis alone, but all of us in the retirement field can work together to avert this one by amplifying the importance of continuing to save for retirement. And in these uncertain times, that work could mean one less crisis to face.
1. https://www.nytimes.com/2022/03/05/business/quitting-your-job-retirement-ira.html?smid=url-share
2 .https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/about-fidelity/FID-SORP-DataSheet.pdf
3. Assumes all 47 million workers who resigned were contributing the $20,500 annual max to a 401(k)
