Why You Should Worry About a Retirement Crisis Even If You Are 20
Nobody wants to work until they die. Most of us hope we have enough eggs to spend the last few years of our lives traveling, relaxing, and spending time with the people we love – not working and struggling to pay bills. Unfortunately, many people find themselves in this situation.
Currently, most Americans cannot afford to retire. America’s impending “retirement crisis” has made headlines recently, but it’s easy to ignore. First, the word “retirement” is not impressive. For most of us, retirement seems so distant that we think we shouldn’t worry about it right now. Second, it seems like the problem comes up from time to time (usually when elections are imminent) and then the media and everyone else forgets about it.
But this does not mean that the problem does not exist, and over time the situation gets worse. Recent data from the University of California, Berkeley showed that the average working American family has only about $ 2,500 in retirement savings. This includes people of all ages, but the outlook for close to retirement families is not much better, with an average savings of just $ 14,500. It’s just not enough to survive the decades after retirement.
The retirement crisis in a nutshell
America’s retirement crisis is a little tricky, but it essentially means organizations that have funded retirement in the past are running out of money. What exactly are these entities? It helps to think of retirement as a three-legged stool.
The three-legged retirement stool is a classic metaphor (for financial planners at least), and it basically means that there are three things that support your retirement:
- Employer Retirement Plans : Retirement benefits offered by the company you work for.
- Social Security : A government benefit paid through taxes.
- Personal savings : your own savings, usually an investment.
Two of these branches, retirement plans and social security, don’t perform well.
Many people blame the crisis for changing the way companies deal with employer retirement plans. Retirement plans are a great plus: your company sets aside a certain amount of money for your retirement as an allowance, often based on your tenure and salary history at the company. But that’s a thing of the past as fewer and fewer companies offer this privilege. From 1980 to 2008, the percentage of employees participating in a retirement plan fell from 38 to 20 percent , and this number is expected to continue to decline.
As an alternative, some employers offer a 401 (k): retirement account that allows you to save a certain amount of your salary and invest it in the stock market. In other words, it is a vehicle for your personal savings. Some employers will allocate a certain amount of your savings, but for the most part it’s up to you to hide the money for retirement. Plus, you need to learn how to invest correctly. Often times, many of us are not worried about either one or the other.
Another problem is the reduction in social security benefits. In fact, the program itself expects that the trust fund reserves will be depleted by 2034, which means that it will not be able to pay the same amounts of benefits that it is paying now.
All We Have: Personal Savings
Between that and the fall in pensions, the three-legged stool sank to one leg: personal savings. Ignoring the crisis means neglecting the only pillar on which your pension should be.
Beyond that, there are also concerns that our retirement is now exclusively in the hands of the financial services and investment industry. And after the 2008 financial crisis, it’s easy to be skeptical about the industry. Most of us have to rely on individual investment (whether 401 (k ) or IRA ) to fund our retirement.
This means that we are at the mercy of funds, the stock market and brokerage firms. Yes, the market improves over time, but the risk is still there, and as anyone who retired during the Great Recession will probably tell you, it would be better if we had these other two pillars to guarantee our exit. retirement is a little better.
If all this is not enough, we live longer. This is usually good, but it also means that you will need more money for the rest of your life if you retire at the same age. There are bills to pay and you are likely to have medical bills, which can be huge expenses.
In short, Americans are extremely unprepared for retirement.
How to fix it?
Experts have all sorts of ideas about what to do, but all three aspects need to be addressed: social security and both types of company-sponsored retirement plans.
Lawmakers in several states (including California, Oregon, and Illinois) are trying to create government retirement accounts for workers. A small percentage of an employee’s salary is automatically saved in a government IRA. We’ve already told you that auto-savers can be powerful and a way to get people to do it. Employees can adjust this percentage (which, for example , in Illinois starts at 3% ), and even opt out of the program if they want. But these government initiatives are making retirement savings the default, which encourages people to save. It’s kind of like social security, except it’s funded not by tax revenues, but by individual salaries, and the money is invested in stock market funds.
The social security problem boils down to this: Taxpayers pay for social security, but it finances the retirement of another generation, and the country is running out of social security money to offer future generations the same benefits. This means that if we continue down the same path, young people will not have full access to the benefits they were already taxed on. We need reform, but unfortunately there is no easy solution. ( AARP has a nifty tool that lets you play legislator and try different solutions.) The answer boils down to funding social security with higher taxes or reducing social security by cutting benefits. It’s a tough trade-off, and the fact that one generation pays for the next makes it a little difficult.
How to make sure you have enough money for retirement
Aside from voting for the people and policies you think will help, the only thing you can really do to retire is to reinforce that third pillar: your personal savings. Yes, this means investing: everyone is afraid of this and is skeptical about it. And it sucks that all our nest is in the power of investment, but it is still better than the alternative: do not do and do not receive a return on their money .
If you are far from retirement, this is good news. Time is on your side, and time is of the essence. The more you invest early on, the more compound interest will grow over time . Even if you can only save a small amount each month , find a way to do it, because that money can really add up. Even if you have debts , you should try to contribute something. If your employer offers 401 (k), consider enrolling, especially if they are offering you savings . No 401 (k)? You can open an Individual Retirement Account (IRA) of your choice. Investing is n’t as difficult as you probably think – you can learn the basics in half a day.
Unfortunately, if you’re close to retirement and don’t have enough savings, you’ll have to play catch-up. You may have the opportunity to work longer: in other words, postpone retirement. Even a few years can make a big difference, not only because of your own savings, but because your social security will also be higher. As Charles Ellis, author of Falling Opportunities : The Coming Retirement Crisis and What to Do About It, explained on ThinkAdvisor :
Every year you continue to work after age 62, you receive 8% more Social Security benefits, ”Ellis said. By age 70, Ellis said, this is equivalent to 76% more monthly payment than what would have been received at age 62. “By spending another 20% of your time, you get 76% more in social security.”
Plus, it gives you more time to build up your savings. You may also consider cutting back on your post-retirement lifestyle or looking for other ways to generate income after retirement . At the very least, you will want to sit down and calculate the numbers. Use the AARP Retirement Benefit Calculator to determine how long you can live after you retire. You can also calculate your Social Security benefits online .
Regardless of your age, you must have a secure retirement plan. Even if you are broke and in debt, consider paying off that debt as part of your plan. Nowadays, it is not enough for most of us to stop working one day. This is an insurmountable problem, and the answers to many questions may seem inappropriate to us. However, ignoring this only aggravates the situation. You cannot deal with the crisis on your own, but you can solve your own situation and do whatever you can to improve it.
Illustration by Tara Jacoby.