Retirement is an interesting subject. Most people dream of a day when they can stop working a full-time job and spend their time doing things they love – like fishing, reading, traveling, or spending time with family.
Yet, despite the appeal of retirement, research shows that very few Americans are putting themselves in the position to enjoy retirement when the day arrives. Why is this? And what can be done to reverse this alarming trend?
The State of Retirement Savings
According to a survey by the Transamerica Center for Retirement Studies, the median retirement savings by age group is as follows:
- Americans in their 20s: $16,000
- Americans in their 30s: $45,000
- Americans in their 40s: $63,000
- Americans in their 50s: $117,000
- Americans in their 60s: $172,000
If you study current retirees, the average retirement age in the United States is 59.88 years old. (The most common age to retire is 62.) And when you consider that the life expectancy for Americans is 78.6 years, this means the average American retirement will last roughly 19 years.
Clearly, there’s a huge gap between what Americans are saving for retirement and what they’ll actually need to sustain two full decades of life. Sure, there’s Social Security and other benefits, but the retirement years shouldn’t be about barely scraping by. Instead, they represent an opportunity to live life to the fullest.
If the average 60-year-old has $172,000 in retirement savings, this means he has enough to cover roughly $10,000 in expenses per year (ignoring the earning potential of the remaining money). That’s not even enough to cover healthcare expenses.
Every personal finance expert or investment advisor uses a different rule of thumb, but many subscribe to the following retirement savings thresholds:
- Americans in their 30s: 1–2 times their annual salary
- Americans in their 40s: 3–4 times their annual salary
- Americans in their 50s: 6–7 times their annual salary
- Americans in their 60s: 8–10 times their annual salary
In other words, a 60-year-old making $100,000 per year should have somewhere between $800,000 and $1 million tucked away in retirement accounts – a far cry from reality.
Why Don’t People Save Money?
Americans know that they should save for retirement, yet only a small percentage of working professional follow through.
People neglect saving for a variety of reasons, including an unwillingness to delay gratification, learned helplessness, stubbornness, and the belief that some miracle event will come in the future (like winning the lottery or inheriting money).
Other people simply don’t have enough earned income to save as much as they should. For example, a single mother who earns $45,000 annually and has four children isn’t going to be able to consistently save 10 percent of her salary. In her eyes, surviving in the present is more important than securing the future.
While extenuating circumstances do hold some people back, most saving issues are psychological in nature. In other words, the most common difference between those with small retirement accounts and those with large nest eggs is a simple shift in thinking.
Finding a Solution
For someone in their 20s or 30s, the solution is pretty simple: Start saving 10 to 15 percent of your income in retirement accounts (like a 401(k) or IRA). With decades to go until retirement, there’s still time to build up a sizeable retirement.
For someone in their late 40s, 50s, or 60s, time is the enemy. While it’s better to start saving now than to never do it all, you’ll require some extra help. Unless you want to work for the rest of your life, you’ll need to find passive income earning opportunities that you can carry with you into your retirement years.
Many successful retirees use rental properties to fund retirement. This provides steady, predictable income on an appreciating asset that can eventually be sold (if desired). It also yields nice tax advantages, which can lower the amount of taxes you owe on an annual basis.
Another option is to purchase an annuity. This is simply an insurance product that you pay into for a few years and then it pays out income on a monthly, quarterly, or annual basis over a determined period of time. Some annuities pay out for the rest of your life. The benefit of annuities is that they provide predictable income (something that other residual income streams may not offer).
The key with annuities is to do your research. Some of these investments are great, while others are downright lousy. Be sure you’re only paying into annuity products that provide a solid return on investment. The last thing you want to do is stunt your potential.
Retirement Education is a Must
While there’s plenty of information available online, it’s important that employers take the time to walk their employees – particularly young employees – through the importance of saving for retirement. Education is the ultimate tool in this fight.