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      This rate is lower than all but a handful of developed countries. Of course, adjustments need to be made for demographics and the degree of “safety net” that a government offers to replace the need for saving for emergencies such as unemployment or healthcare costs. However, even after considering both factors, it seems clear that the U.S. savings rate is insufficient for many to achieve a comfortable retirement.

      Social Security presents an additional risk. In the United States, the amount Social Security expects to pay out exceeds the amount coming in. As the report of the Trustees of Medicare and Social Security report:

      The numbers of Social Security don’t add up due to demographic trends. America has a rate of immigration that keeps its population, on average, younger than in many developed countries because immigrants tend to be younger than the average population. Despite this, the average age of the U.S. population is approximately 37,3 and there will be increasingly more people in retirement than are working. That’s a problem because the system is generally expected to balance what gets paid in (contributions from workers) with what gets paid out (payments to retirees). As retirees become a larger proportion of the population the balance breaks down. The Social Security problem is something that can be addressed with political will. However, doing so will likely mean a higher retirement age and potentially lower payments. As a result, reliance on individual savings is likely to increase.

      Many people are ill prepared for retirement. Northwestern Mutual runs an annual study on the topic and finds that 42 percent of U.S. adults have not spoken to anyone about retirement, and that people are generally more comfortable talking about death or sex than retirement topics.4 Often, those who have limited confidence in their retirement also describe themselves as having “debt problems,” according to Employee Benefit Research Institute (ERBI) research.5

      The Key Change in America’s Retirement Planning Process

      It used to be different. Previously, defined benefit plans avoided this problem; an employer took responsibility for retirement outcomes of their employers and the investment allocations to meet those needs.

      Over time, the emphasis for most nongovernment employers has switched to providing contributions that employees can use to plan for their own retirement in 401(k) plans and similar tax-efficient vehicles. However, this apparently simple switch conceals a fundamental transfer of risk. Whereas previously employers bore the risk of their employees having a successful retirement, now employees carry the risk. The employer was once on the hook for providing a payout in retirement; now they no longer guarantee any payout in retirement. If the employee makes poor investment decisions or doesn’t save enough, then their employer isn’t going to step in and help when retirement comes. And, of course, most people are untrained in investment management.

      An employer can be expected to bring in the expertise to understand investment allocations and cost minimization in retirement choices. However, evidence suggests that employees can chase historic returns and use basic strategies such as investing 20 percent across each of five options that are present, even if some choices are very similar and some are not, or loading up on stock in their employer, since they are familiar with the company. These sorts of errors may seem trivial, but can translate into worse investment outcomes when compounded over decades. Other errors, such as significantly overpaying for investment advice or investing in dubious asset classes, can have far worse consequences.

      Of course, advice is available, but while employers could find some of the best consultants available and spread that knowledge and benefits over thousands of workers, employees typically seek advice one on one, which is less efficient because it doesn’t scale across a large group of people, and can cost as much as 2 percent of the employee’s assets to get solid, if fairly generic, retirement advice. The problem of high-cost investments is discussed in detail in a later chapter, but unlike other goods and services, with investment advice you typically pay for the advice with the very savings you have, so high costs can make it hard to achieve your investment goals. This is unlike other purchases because with investment advice you are reducing your rate of return with the fees you pay in order to attempt to increase your rate of return – a direct contradiction. This is why keeping costs low matters.

      How Financial Innovation Helps

      Fortunately, just as the landscape for retirement support has changed, so innovation has enabled employees to get a better deal. Exchange-traded funds (ETFs) are a critical ingredient here. Unlike mutual funds, which have cost and tax inefficiencies, ETFs often provide the building blocks to assemble a robust portfolio at low cost. In conjunction, algorithmic advice can scale practically infinitely using technology. This provides portfolio management techniques that previously were the reserve of secretive quantitative teams to be publicly available. This means both the instruments and the techniques to ensure a successful retirement are now broadly available. The benefit here is not in lowering the costs of an existing service, but in expanding the reach of that service. Previously, even with relatively high fees, it simply wasn’t economical for a financial advisor to serve a client with less than half a million in assets. The percentage of assets to make it worth the advisor’s time would eat into the client’s investment returns and provide only a meager return for the advisor. This meant that prior to digital investment services, most of America was in the painful position of not necessarily wanting to manage their own investment

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