A wise person once said, “Retirement is wonderful if you have two essentials: much to live on and much to live for.” Unfortunately, many people are living contrary to this maxim; they have much to live for, but they don’t have much to live on.
The crux of the problem in the United States is that Americans have failed to adequately prepare for retirement. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households, almost 25% of adults in the U.S. have no retirement savings or pension at all; a scant 36% of non-retired adults think that their retirement savings will be adequate when they retire. For those with a 401(k) plan, the median balance for those aged 55-64 is estimated to be less than $62,000.
These are fascinating statistics, but what do they mean? Most notably, they provide hard evidence that proves there is a retirement savings crisis in America.
Most people want to retire as soon as they can. They dream of living life on their own terms and not someone else’s, a life spent doing what they want to do on their timeline.
Many people think that “early retirement” is age 62 because that’s when you become eligible to receive Social Security benefits. With the average life expectancy for men and women averaging 78.6 years, someone retiring at age 62 would need at least 17 years of funding saved up.
Based on the numbers previously given on the amount of retirement savings accumulated by most Americans, many people are outliving their money. Americans are inadequately preparing financially for retirement, and when they retire, they don’t have enough saved to last them for the rest of their lives. This is the American retirement savings crisis.
There is no singular reason that can be pointed to as the cause of the retirement savings crisis. There are, however, multiple causes that are shared by many Americans. They include:
- Not having a retirement plan where they work. Less than 50% of employers offer a 401(k) to employees.
- Not participating in a retirement plan made available to them by an employer. Only 40% of U.S. workers participate in a 401(k) available to them at work.
- Not adequately contributing to a plan they participate in.
- Not contributing to an IRA if they don’t have a retirement plan at work.
- Retiring early due to losing their job.
- Retiring early due to a disability or illness.
- Retiring early to care for aging parents or a sick spouse.
We can conclude that lack of planning and the need to retire early are major causes of the crisis we’re facing. As for early retirement, the Employee Benefit Research Institute found that nearly half (48%) of American workers retire before they planned to.
When retiring early, many workers are forced to tap into their Social Security retirement benefits. By taking benefits beginning at age 62, the monthly income benefit can be reduced by as much as 30% had they waited until age 70. This has a substantial impact on their retirement savings and income for the remainder of their lives.
The Great Recession of 2008 has also had a direct impact on American savings for retirement. In addition to causing many Americans to lose their homes and the equity in their homes, interest rates were dropped to near zero. This had a negative impact on American savings by creating an environment that offered no incentive to deposit money into savings accounts.
Also adding to the woes has been the pandemic of 2020. Tens of millions of Americans have lost their jobs, and many have been forced to make withdrawals from their retirement accounts just to make ends meet. Employers have either terminated retirement plans, or stopped making matching contributions to them. And interest rates have once again been intentionally lowered to near zero percent to stimulate the economy, though it discourages depositing money into savings accounts.
If you’ve not yet retired, you may still be able to take steps to minimize your exposure to the retirement savings crisis and have a more secure retirement. Some of the steps you can take are:
- Start early. Compound interest has been called “The Eighth Wonder Of the World.” Putting money to work for you as soon as possible and having that money earn interest over the years is among the smartest money moves you’ll ever make. Contributing $2,000 per year for 40 years into an IRA, a total of $80,000 in contributions, would produce a balance of over $427,000 in your account, assuming a 7% return. There is no better argument for starting early. Second best: start as soon as you can.
- Stay healthy. By following your doctor’s advice for medication, eating properly, and exercising regularly, you stand a good chance of being physically able to work and avoid early retirement. However, the unexpected happens, so have adequate disability insurance to replace your income in case you suffer a long-term injury or illness. There's also critical illness insurance, which fills the gaps in your health insurance so you won’t deplete your retirement savings in the event of a major illness.
- Take control of your career and income. Prepare yourself for downsizing or layoffs by making yourself more valuable to your employer by preventing obsolete skills. Find ways to improve yourself professionally through training and education, and begin your own career planning by setting career goals.
- Create a financial plan. There are many financial calculators online that you can use to project what your retirement income will be at a future date based on your current age and rate of savings. You can also get a Social Security statement to show you what your projected benefit will be at various ages. Combining these two numbers can paint a pretty clear picture of what your financial life will look like when you retire.
Consider using a financial planner to devise a complete retirement plan for you. Someone who’s been trained in advising people on retirement planning can be a big asset to you, and they can take the guesswork out of making sure you’ll have the financial resources you’ll need to have when it comes to time to retire.
Jack Wolstenholm is the head of content at Breeze.
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