If you ask those in the know, our country is on the verge of a retirement crisis.
Workers aren't saving enough, they're depending too heavily on overburdened social safety nets, and even government pensions aren't always guaranteed anymore.
So the question is this – just how far behind are we falling, and what can we do in order to ensure that our own retirement doesn't end up in the tank?
Retirement And The Three Legged Stool
In preparation for a recent Money Mastermind Show, I watched the movie Broken Eggs Film. The movie is all about the looming retirement crisis, and how the dream that we've all been sold by those in power – a happy comfortable retirement – is in peril. We discussed it on the episode:
One of the filmmakers, Andrew Meadows, explored the idea on the show of how retirement was typically supposed to be like a 3 legged stool, with each leg providing support for your golden years of retirement.
The first leg is Social Security, providing the bare necessities of life, keeping you out of poverty.
The second leg is a company pension. In the past people would often work at the same company for 30-40 years, and when they retired they would be provided with a pension that would help them to have a comfortable retirement.
The third leg of the retirement stool is your personal savings and retirement contributions.
The question is, can we even rely on that 3 legged stool anymore? And are too many people relying on just the one of those three legs – Social Security? Will their stool even stay standing?
Social Security & Pensions Are No Longer A Sure Thing
One of the ideas discussed in the movie is that Social Security and pensions are no longer as sure a thing as they once were.
First of all, Social Security was never meant to provide a comfortable retirement. It was meant as more of a backstop to prevent those in old age from descending into poverty. Not only that, but the demographics have shifted significantly since it was enacted, there are far more retirees taking Social Security these days.
In 1950 there were 16.5 workers for every Social Security beneficiary. Today there are less than three workers paying in for each recipient.
The average monthly social security check for retired workers is about $1269 (SSA July 2013), so that doesn't exactly provide for a high-living lifestyle in retirement!
Pension plans are also having problems nationwide, and many are even going bankrupt.
In 2010 states were $1.38 trillion short of retirement obligations to public sector employees. (Pew Research Center)
Pensions, which were once a pretty sure thing, have been harmed by poor investment decisions, mismanagement, down markets and fewer employees giving into the program and a larger number of retirees taking out. We will have about 10,000 baby boomers hitting retirement age every day from now until 2030 (Pew Research Center)!
In my opinion, it's time for people to realize that they can't depend solely on the government or their employer for their retirement. They're going to have to save a majority of their own retirement nest egg!
Retirement Savings Are Too Low & People Are Living Longer
If you can't depend on Social Security and a pension to pay for your retirement, you're going to have to rely more heavily on that third leg of the stool, your personal savings.
The problem? American workers aren't saving! Workers are estimated to be $6.6 trillion short of what they need to retire comfortably (Center for Retirement Research Boston College).
Not only are they not saving, but they're living longer. Americans who make it to age 65 today can expect to live roughly 18-20 more years. That's at least 6 years longer than in 1940.
Here are some uncomfortable stats about how much people are saving from the Employee Benefit Research Institute:
- 48% or workers of all ages had less than $10,000 in savings for retirement.
- 60% of workers have less than $25,000 in retirement savings.
- 70% had less than $50,000.
- 80% had less than $100,000.
- Of those 55+, 60% of them had less than $100,000 saved.
Why Are People Not Saving For Retirement?
The question is this: Why aren't people saving? Some ideas:
- They mistakenly think the first two legs of the stool, Social Security or their pension, will provide enough to live on.
- They underestimate how long they’ll live in retirement.
- They don't factor in health care costs in retirement costs.
- They believe family will take care of them.
- They’re not able to save after monthly expenses.
- They don’t plan on ever retiring.
Unfortunately many of the assumptions people are making are erroneous, in my opinion. People have their head in the sand about just how much money they'll need, and just how high their costs may be. It's time to realize that you need to save for yourself, not depend on underfunded government programs or a shaky, mismanaged pension.
Steps To Take To Get On Track For Retirement
So what can you do in order to ensure that your retirement savings plan is on track to provide for you in your golden years? Here are a few ideas.
- Simplify your lifestyle: Simplify your life where you aren't spending money on a lot of non-essentials, things that end up being clutter in your basement, and a drag on your budget.
- Make savings a priority: Make saving for your retirement a priority in your budget. Have it be the first line item before everything else.
- Open a retirement account now: Make sure to invest in a company 401(k), especially if there is a company matching contribution. Barring that, open a Roth IRA and start investing on your own! My favorite places to invest? A Roth IRA with Vanguard, Betterment, Wealthfront or WiseBanyan.
- Make saving automatic: Automate good behavior if you can, and that includes saving for retirement. Setup automated deposits into your retirement accounts, either through your paycheck into a company 401(k), or on your own into a personal IRA or Roth IRA.
- Push yourself to save more each year: Don't just be satisfied to save what you're saving now. Increase your contributions as it becomes possible. Invest lump sums you receive through tax refunds, inheritances and other things.
- Don't make big financial mistakes: Avoid making life changing financial mistakes like spending too much on a house, or getting in so much student loan debt that you're trapped in debt for decades. Big mistakes like those can seriously hamper your attempts to save.
The clock is ticking. The longer you delay finding solutions for your own retirement, the uglier the solutions are going to have to be.
Start saving now so that your future self will be able to retire, and do the things you want to do.
What are your thoughts on the looming retirement crisis? Have you done enough to plan ahead for your retirement? Are you saving more than the average person?