A comfortable retirement is the culmination of the American middle-class dream. However, income data suggests that many Americans can’t afford middle-class lifestyles while also saving or investing enough to support themselves through 20 or more years of retirement. There are plenty of reasons why the average American saves less than 10% of their annual income, but student loans, credit card debt, medical debt, low wages and high costs of living are commonly brought up as deterrents to saving.
The result is that the average American has not saved enough for retirement. This chart below shows results from a survey asking 2,000 people how much they’ve saved for retirement:
A startling 45% of the respondents did not have any retirement savings at all.
On one hand, it could be argued that perhaps the results were skewed because younger people are more likely to take an online survey. Younger workers who are still in the early stage of their careers, perhaps still paying back student loans, may not have had the time or opportunity to invest or take advantage of compounding returns yet. This can be witnessed in a survey by Natixis, which says that the average saver puts 6.8% of their annual income into their workplace retirement plan. The older generations save around 7-8%, but Millennials save just around 5.7%.
On the other hand, this may be the reality for many older adults as well. In a survey by Natixis, 47% of Boomers surveyed said that they regret not saving sooner, and 35% said they wish they’d saved more. In the same survey, the average 64-year-old said that they had only accomplished 30% of their goal to save $1 million by retirement.
The number also varies across various socio-economic groups. In the survey above, two-thirds of women (63%) say they have no savings or less than $10,000 in retirement savings, compared with just over half (52%) of men.
All in all, this article—which references research by J.P. Morgan Asset Management and the Census Bureau—estimates that around 74% of Americans are behind on their retirement savings.
What you can do to stay on track with retirement planning
If you are reading this article, you’re likely interested in starting to save for retirement or maximize your savings and investments for retirement. Here are some ways to increase your future retirement funds.
For many years, Social Security was a safe, stable, and reliable retirement strategy. It was designed to serve as a safety net for retirees to pay for basic necessities at a time when life expectancy was lower.
Now, however, the US has a rapidly aging population with a longer life expectancy. Additionally, there is an expectation of a higher quality of life in retirement that is threatened by ever-increasing healthcare costs and medical bills.
These factors have led to Social Security payouts being spread thinner with each passing year. The average Social Security benefit was $1,503 per month in January 2020. For many people in the US, this amount may not be enough to live on. And yet, for people who are currently retired, half of single retirees rely on Social Security for the bulk of their income, according to the Social Security Administration.
Pensions/Employer matching retirement programs
An estimated 79% of Americans work for an employer that provides a retirement plan, yet new research from the US Census Bureau suggests that only 41% of those employees contribute to their retirement plans.
Many companies have now moved to mandatory employee contributions or setting up new employees to a default contribution percent to increase those numbers. While some people are complacent when it comes to taking charge of their own retirement, the more likely reason is that they probably feel intimidated by the options and are not aware of the risks of not signing up for a retirement plan.
The good news is that when people are informed about their financial decisions and have access to personal finance education, they are able to make better decisions. Natixis found that while less than half of those surveyed get professional financial advice about their money for retirement, those who did get advice contribute more to their plans—7.2% of their annual salary versus 6.5% for those who don’t get advice. Over many years, this difference could add up to tens of thousands of dollars.
Forecasting and budgeting
Rather than using a number that works for people on the internet, take the time to figure out how much you might spend each year in retirement. Think of expenses such as rent/mortgage, food, transportation, health and medical bills, entertainment, and taxes. It is also a good idea to have an emergency fund so if you get an unexpected expense you are able to cover it.
If you have some questions about your retirement planning or are considering a few different options, such as moving to another state or country, working part time through retirement, or calculating the costs of healthcare, you can create a base budget and additional scenario budgets. You could even have a stretch budget that accounts for the nice-to-haves in life. Doing this work will make you more confident about the number you decide to pursue for retirement.
Finally, take the time to develop the income part of your budget. What are some of the income sources you will have available in retirement? Estimate returns on your pension, investment income, Social Security, and any other available revenue streams to get a good idea of what you’ll be able to afford in retirement.
Pay down debt
Four in 10 retirees cite “paying off debt” as a current financial priority, according to a new report from the Transamerica Center for Retirement Studies. Try to pay off debt as much as you can during your work years. Debt snowballs as time goes on and compounding interest will make the situation much worse if you wait until retirement to pay off debt.
Some loans can also lower your Social Security payments. Federal tax bills, child support or alimony, and federal student loan debts are all eligible for garnishment. Make it a priority to pay these off before you retire.
Prioritizing saving for retirement now
Many Americans have a “live life to the fullest” mentality. Spending on the trappings of social media-influenced lifestyles, including travel and copious material possessions, has increased. Younger generations such as Millennials and Gen Z may believe that retirement is far away and they can start saving for retirement later, but this thinking is harmful in the long run. People who start saving and investing in their 20s may end up with hundreds of thousands of dollars more over their lifetime than if they started investing in their 40s. If you start investing when you’re 40, you’d have to save three or four times as much each month to accumulate the same amount as someone who started saving earlier.
The power of dollar-cost averaging and consistent savings, even in small amounts, will pay off significantly in the decades between you and your retirement. Use this calculator to estimate what your investment returns in retirement will be if you start saving today.
The average American is not ready for retirement: around 45% of the population may be at or near zero dollars in retirement savings. Many people will have to depend on Social Security, which is more unstable than ever. The individual may not be entirely at fault in this situation: rising costs of living coupled with flat or decreasing wage levels, fewer opportunities for education and employment, and lack of personal finance knowledge are partly to blame.
However, you can take steps to secure your retirement no matter your age or current financial situation. Start with the resources available to you through your employer’s pension plan—try to contribute at least what your employer is offering to match. If you do not have access to an employer retirement plan or if you’re already contributing, look to tax-advantage investment accounts that will allow you to accumulate tax-free capital gains over a long period of time. Pay off debt and create a budget for your retirement spending. Start investing consistently, and your future self will thank you.