Credit Sesame highlights challenges with the average retirement plan and shares tips for improvement.
With low unemployment and a soaring stock market, you might expect that Americans are getting themselves in good shape for retirement. Two recent surveys suggest that this is not the case. A study of current workers showed that while most middle-income earners save for retirement, they generally do not save enough. Retirement saving can be challenging, but it can be handled in small steps with the right habits.
50% of retirees did not save enough
An Employee Benefit Research Institute (EBRI) survey examined how Americans between 62 and 75 years find their financial health in retirement. Half the retirees surveyed said their savings weren’t enough to cover their needs. Only about a third said they’d saved the right amount, while 17% said they’d saved more than enough.
The issue of not saving enough may be even worse than these numbers suggest. That’s because 68% of retirees said they owed credit card debt, which shouldn’t be necessary if savings were enough to cover their living expenses. Given the high cost of credit card debt, why would these retirees carry it? They may also have saved too little for retirement.
What about the current workforce?
The Principal Group found that 77% of middle-income earners are saving for retirement. That’s more than three out of four, which sounds pretty good. However, not all these people save enough to cover their needs. The survey indicates that saving households put aside an average of 7.8% of income for retirement. This is well short of the Principal Group’s recommended target of 15%.
In a news release about the survey, a spokesperson for the Principal Group put an optimistic spin on this 7.8% savings rate. Teresa Hassara pointed out that if these workers also receive a typical employer match of 4% to 6% on their retirement contributions, it would put them “within range” of the recommended savings rate.
That’s a nice thought, but it doesn’t quite add up. First, not all employees participate in a retirement plan with an employer match. Plus, even if someone saving at a 7.8% rate received a 4% to 6% employer match, that would put their total savings at 11.8% to 13.8%.
This is significantly short of the 15% target. Projected over decades of retirement saving, being off by a few percent is like being off by a few degrees in the direction of space travel – it eventually leaves you hopelessly far from your desired destination.
The survey also found that 30% of respondents have compounded the under-saving problem by making early withdrawals from their retirement accounts.
People may think they will make up for those lost savings by putting more into the plan later on, but that often proves impossible because of a combination of factors:
- Tax penalties on early withdrawals
- Lost investment earnings while the money is out of your account
- Annual contribution limits on tax-deductible saving
- Plan limits on annual employer matches
There’s one more sobering thing about the Principal Group’s retirement survey. It was based on middle-income earners, which they defined as people earning between $50,000 and $99,999 a year. However, roughly 30% of Americans earn less than $50,000, so there are many Americans whose retirement savings are probably even worse off than those portrayed by this survey.
Tips for a better retirement plan
Saving money for retirement is hard, and there is no one magic solution. Instead, there are smaller, manageable steps you can take to get your retirement saving in better shape.
- Build your budget around a workable saving goal. People tend to save any money they have left over from their day-to-day expenses. Instead, you should start by budgeting enough savings to reach your retirement goals and fit the rest of your budget around that.
- Keep your credit healthy. From credit cards to car loans to mortgages, you will probably use credit throughout your adult life. Monitoring your credit and taking steps to build credit can help ensure you get lower interest rates. That will leave you more money for retirement savings.
- Avoid credit card debt. Credit card debt is much more expensive than most other forms of consumer debt. Carrying regular credit card balances creates an ongoing drain on your finances. That can hurt you both now and in retirement.
- Do not dip into savings early. As retirement balances grow, viewing them as a resource you can tap into as needed is tempting. However, dipping into retirement savings early can be hard to recover from.
- Do not coast after good investment years. A few good years make people think they’re far enough ahead on their savings goals to cut back on their plan contributions. Remember, year-to-year investment returns are erratic, so you need to keep any cushion you earn in reserve for the inevitable lean years.
The EBRI survey found that half of retirees regret not saving more for retirement. Try not to put yourself in the position of discovering that after it is too late to do anything about it.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.
