Suppose you could teleport to your 70th birthday. What would you hope to find yourself doing? Going on a cruise ship? Writing your memoir? Partying in Ibiza or basking in the sun on an exotic tropical island?
Very few of us would answer flipping fries at Mcdonald's, scrubbing toilets at Burger King, or begging for money on the street. No one wants to spend their retirement years that way, but surprisingly very few of us are taking the basic steps to avoid it.
Let's start here, "With your current savings, can you comfortably enjoy retirement for the next 30 years, or will you have to keep working?"
Regardless of your answer, the simple fact remains that we eventually lose the drive or physical ability to keep working as we age. The older you get, the harder it will become for you to maintain a demanding work schedule. And when that happens, you'll have to quit the workforce and retire.
But here's the thing: so much has changed over the years that not everyone who wants to retire comfortably can do so.
You see, back in 1965, the life expectancy of an average person was 70 to 75 years meaning retirement was thought to last only a few years. But that's no longer the case. A lot has changed since then.
Currently, the average American has a retirement lifespan of 20 to 30 years. Let that sink in for a minute. Thirty years with no salary? That's quite terrifying, right? Is that even possible?
Though several experts believe this guideline could get you on the right track, most people in the U.S. are still finding it hard to save for retirement. In fact, a recent survey by the American Advisors Group revealed that more than a third of Americans today feel unprepared or unsure if they are on track for retirement.
Worse yet, an alarming number of seniors are delaying retirement beyond the traditional age, and some intend to work for the rest of their lives. Also, nearly one in five seniors, about 18 per cent, said they plan to work past the age of 70, and an additional 12 per cent said they do not plan to ever stop working full time.
Experts believe that if the statistics continue to the negative, the U.S. will likely experience a retirement crisis that could cost the federal and state governments an estimated $1.3 trillion by 2040.
So, what's really happening?
Unlike in the past, retirement saving has now become more complicated. It's no longer as simple as putting aside a fixed amount of money every month and hoping for the best. Today, the financial decisions we make concerning retirement planning are significantly influenced by several factors, such as;
The rise in life expectancy.
According to projections made by the United States Census Bureau, the average lifespan of the American population is expected to rise from 79.7 to 85.6 in 2060.
This means you'll have to budget for a more extended retirement period, and you may need to keep working for a while to build up a sizable savings account. It also means that you may need additional funds for health care and long-term care expenses such as assisted living or care in a nursing home.
Of course, Medicare may help pay for some of these expenses, but you can't entirely rely on it because it does not cover everything. You'll either have to get supplemental insurance or pay the bills yourself. So, if you don't include these expenses in your budget, they could significantly deplete your retirement savings. And as a result, you may struggle financially or have to depend on others to get by during your retirement.
Secondly, the increasing cost of living is making it harder for most people to save for their future. Back in the day, the expenses for housing, healthcare, and education were more reasonable, allowing people to set aside a more significant portion of their earnings for their retirement. Unfortunately, today, continuous inflation has drastically affected the economy, making it difficult for most people to plan their finances.
Inflation affects the prices of goods and services that we rely on, such as housing, healthcare, food, and transportation. These essential expenses become increasingly expensive, which can be particularly challenging for you or someone who relies on their retirement savings. It may strain their budget, forcing them to make tough choices and potentially cutting back on certain expenses.
But that's not all. If you're a retiree who has invested a portion of your savings into fixed-income assets like bonds, certificates of deposit, or annuities, inflation can pose an additional challenge. It could make the real return on these investments less than it would have been. In other words, the amount of money you can buy with the interest you earn may go down over time. This can directly affect your overall income and financial security, making it harder to maintain the same standard of living you had envisioned for your retirement.
The other factor is the shift from traditional pension plans to individual retirement accounts and 401(k) plans.
The decline in pension provisions is making it harder or even impossible for people with jobs to save for their retirement. In the past, employees were automatically enrolled in defined benefit plans with pre-set funds to match their retirement needs. Now, the tables have turned. Workers have to sign up for retirement plans like 401 (k)s and set their savings goals.
This transfer of responsibility requires you to actively manage your investments, which might expose you to market risks you are not equipped to handle. The other downside is that these plans are often flexible, which means you can take money out early. This makes it easy for you to steal from your retirement savings. Which is a terrible move.
Furthermore, the changing employment trends are not making things any easier. It is estimated that about one-third of the U.S. population participates in the gig economy, and the number is expected to rise as more organizations turn to independent contractors to cut costs. While this arrangement may benefit the company, it comes at the employees' expense.
For instance, if you work for any one of the thriving renowned gig-economy companies such as Uber, Upwork, Lyft, or Door dash, you are treated as an independent contractor. Therefore you might not be entitled to their employer-sponsored retirement plans. This means that you neither have the resources nor the guidance necessary to adequately prepare for retirement.
Lastly, there is a lack of financial literacy and education around retirement planning. In a time when prices are constantly rising, and many people are facing financial hardships, it's more important than ever to be financially literate.
Surprisingly, a recent survey by Go Banking Rates revealed that one-third of Americans don't believe they possess enough knowledge about retirement. While 37 per cent feel they need more education and information about retirement planning, 52 per cent wish they knew more about investment strategies.
In other words, many of you don't understand the importance of planning for your retirement early, sticking to a regular savings pattern, and making wise investment decisions. This lack of knowledge can lead to bad financial decisions and not saving enough for retirement, making an already difficult situation even worse.
Speaking of saving. How much does one really need to retire comfortably? $1 million? $2 million? More?
According to Charles Schwab's latest study, the average American worker believes they'll need about $1.7 million to enjoy a comfortable retirement, but this varies by generation. While the Gen Zers (age group 11 to 26) estimate that they'll need to save approximately $1.4 million, millennials, that's age group 27 to 42, anticipate a higher target of $1.8 million for a secure retirement.
But here's the thing; saving for retirement is a deeply personal effort that requires patience and time. Also, the specific amount you need to keep can vary significantly based on numerous factors, such as your target retirement age, anticipated lifespan, living cost in your area, lifestyle choices, and other circumstances.
But as a starting point, Fidelity Financial firm recommends saving at least 15 per cent of your pre-tax income for retirement. This includes any contributions matched by your employer. But, this guideline is only practical if you start saving at 25 and work until you're 67.
Unfortunately, not everyone can begin saving for retirement at the age of 25 or manage to consistently save 15 per cent of their income. If you find yourself starting to save later in life or saving a smaller portion of your salary, it might mean that you'll need to work for a longer time, reduce your expenses, or contribute a higher percentage of your earnings to your retirement fund.
For instance, if you start saving at age 30, Fidelity suggests saving at least 18 per cent of your pre-tax income. If you begin at 35, it is recommended that you save up to 23 per cent of your pre-tax income.
However, in the U.S., most Americans are behind on their retirement savings goals. In a recent survey by Bankrate, 55 per cent of Americans said they don't have as much money saved for retirement as they should. Of this group, about 35 per cent said they are far behind on their savings goals, while 20 per cent said they are slightly behind.
Likewise, a survey by GO Banking Rates found that only 14 per cent have saved $100,000 or more in their retirement accounts, while 78 per cent have saved $50,000 or less for their retirement. While respondents aged 65 and older reported the highest savings, only 36 per cent have saved $100,000 or more. And nearly 24 per cent haven't saved anything for retirement.
These figures clearly show a big difference between how much money experts say we should save for retirement and how much the average person saves, especially as they get closer to retirement age. And several factors contribute to this issue. For instance;
As inflation rises and Americans struggle to make ends meet, fewer people are putting money aside for retirement. A recent survey by Anytime Estimate found that among those not yet retired, only 63 per cent are actively saving for retirement. That's a drop from 93 per cent before the pandemic.
In the same survey, most people revealed that they are not saving for retirement because they don't have enough money to spare. About 37 per cent said they didn't earn enough money, while 26 per cent said they had no job at all.
Low wages coupled with high living expenses make it hard for the average person to set aside money for retirement, especially when there are other pressing bills and expenses to take care of. As a result, people may find themselves prioritizing immediate needs over long-term savings.
The absence of an emergency fund also derails people from achieving their retirement financial goals. If your salary is barely enough to meet your basic needs, you don't have disposable income for your emergency fund. So when unexpected financial emergencies such as home repairs, medical bills, and so on come up, you are forced to tap into your savings, if any, or redirect funds away from your retirement accounts.
Similarly, a considerable debt burden could prevent you from saving enough for retirement. Every dollar you owe in student loans, credit cards, mortgages, auto loans, and medical bills cuts into your retirement savings or prevents you from allocating more money to your retirement fund.
Most of the time, you have to make regular payments on these loans, which leaves you with barely enough to save or invest. And since you probably have a lot of bills to pay, it may also be difficult for you to quit your job.
Always remember that debt can ruin your finances regardless of your age. Luckily, you can do something about it. For instance, you could restructure your savings, income, and expenses to free up some cash to pay off your loans on time.
Most Americans also find it hard to save money because they don't have access to workplace retirement plans. Not all employers offer retirement plans like 401(k)s, and even when they do, not all employees are eligible to sign up.
When you don't have the option to join a retirement plan through your job, it means you're missing out on a convenient and effective way to save. These plans usually have benefits like employer matching contributions, which can boost your savings. So, not having access to such plans can be a real obstacle to a comfortable retirement.
The other common major mistake most Americans make is putting off retirement preparation and underestimating the value of time. Most people delay saving for retirement because they assume they have plenty of time to catch up later.
Yet the earlier you start saving, even with small amounts, the more compound interest can work in your favour. Saving small amounts of money early can pay off much more than large sums saved later. Let me briefly explain how compounding works using these two scenarios.
Here's John. He started saving $100 monthly when he was 20 years old. After 40 years, with a 4 per cent average yearly return compounded monthly, John ended up with $151,550 at 65. Yet, his initial investment was only $54,100. Impressive right?
Then there's Nicky, John's twin. Nicky started saving when she turned 50. She began with a lump sum of $5,000 and then lowered it to $500 monthly for 15 years. Like John, Nicky also got a monthly compounded 4 per cent return. However, by the time Nicky turned 65, her total savings were only $132,147, even though she had initially invested $95,000.
Despite investing roughly twice the initial amount John did, Nicky's savings still didn't grow as much as his. It just goes to show that starting early and giving your money more time to grow can make a big difference in the long run. So, keep in mind that it's not only about how much you put in at the start; it's also about how much time you give your savings to grow.
If you don't have a retirement plan, you should create an account immediately. If your employer doesn't offer one, you can set up an individual retirement account for yourself.
If you are self-employed, you can open a traditional individual retirement account or a Roth individual retirement account and decide how much you want to pay daily, weekly, or monthly. Of course, your savings goal should be based on your financial situation. Luckily, there are retirement plans for every income level.
And lastly, as I mentioned earlier, financial illiteracy is also a significant hindrance to retirement planning. If you have limited knowledge about personal finance and retirement, it will be hard for you to understand how to effectively manage your money. It will also be hard for you to choose the retirement plans that best suit you.
Here, let's look at some of the challenges unprepared retirees face during their retirement.
"If I had planned harder when I was younger, and things had gone better, I wouldn't be going to work this morning, I would be going fishing, or I would go hunting. Or I would be going on a little trip somewhere."
Those are the regretful words of 80-year-old Tom Coomer, who works a part-time job five times a week at Walmart as a greeter. He has worked at the job for nine years, and his backstory is sad.
Coomer lost his job as a machinist in 1994 when McDonnell Douglas Tulsa went out of business. He had been with the company for 29 years and was 56 years old at the time of his forced early retirement. He is just a year short of his full pension. Since then, Coomer and his wife have never recovered financially.
Over the years, they've depleted their retirement savings. Still, they've also made sacrifices to cope with their dire financial situation, like downsizing their home and lifestyle. However, nothing much has changed as they still have a mortgage they can never pay off.
According to the U.S. Department of Labor, the average American over 65 lives on $4,125 a month. But with his partial pension, social security, and Walmart paychecks, Coomer and his wife live on roughly $3,100 per month. That's about $1000 less than the national average. Coomer is concerned that he will never be able to retire.
Like Tom Coomer, Mr. Charles Smith III is now working part-time as a produce clerk at Grasch Foods, earning $10 per hour. He took this job to support his daughter, who is in college and needs about $20,000 per year.
Charles retired in 2010 after working for the federal government for 12 years, but at the age of 63, he decided to go back to work. This is simply because he is determined to prevent his daughter from graduating with $80,000 in debt.
However, his health has been affected by his work schedule. He now has an illness called Plantar fasciitis, which causes constant pain and makes it difficult for him to execute his duties at work. That's why he wants to relocate to North Dakota to find a full-time desk job that is less physically demanding, with or without benefits.
Tom Coomer and Charles Smith are just two of the millions of retired Americans re-entering the workforce. According to the U.S. Bureau of Labor Statistics, the number of people aged 65 to 74 in the workforce is expected to rise to 30.7 per cent by 2031.
This makes us wonder: Does living in retirement cost that much?
There's no definite answer to this because we all have different spending habits that are often influenced by various factors such as our financial situations, where we live, our lifestyle choices, and inflation rates, among others.
However, by looking at the average spending habits of current retirees, we may better understand how much we should expect to spend on different items during retirement. These include;
Housing costs; For most retirees, housing-related expenses (such as rent, property tax, mortgage, insurance, maintenance, and repair charges) account for the greatest portion of their annual budget. About 80 per cent of those aged 65 and above own their houses. Still, about a third of their monthly spending goes toward housing-related costs.
On average, retired households spend around $17,472 per year (that's about $1,456 per month) on housing, which makes up almost 35 percent of their yearly expenses.
Health care costs:
In your retirement planning, don't forget to include funds to cover healthcare expenses, including medical insurance, visits to the doctor, and prescription medications. On average, most retirees spend an average of $6,833 yearly, or $569 monthly, for these necessities.
You should also familiarise yourself with long-term care. Whether or not you need a policy, you should at least understand what it covers and your options. You should also learn about the out-of-pocket costs so you can include them in your retirement plan, especially if you don't have insurance.
Other daily or weekly expenditures to consider include the following;
Transport: When you retire, your commuting costs will undoubtedly decrease, but not all transportation costs will follow suit. This includes vehicles, gas, insurance, maintenance and repairs, car rentals, leases, payments, and public transportation. The average retiree household spends $7,492 per year or $624 per month.
And then there's food. This includes items purchased to eat at home as well as dining out. Food costs retiree households $6,599 per year, or $550 monthly.
Utilities such as gas, electricity, water, phone, and Internet charges cost most retiree households about $3,810 annually.
Please note that these figures are just estimates, and the actual expenses can vary depending on factors like your financial situation, geographical location, lifestyle choices, and inflation, among others. To create a more precise retirement budget, you should speak to a financial advisor and conduct a detailed assessment of your situation.
If your current income is barely enough for you to survive, let alone to set aside a 15 percent portion of your retirement savings, don't give up just yet. Several opportunities can help you boost your income. For instance;
You could find part-time work on online platforms, taking up gig economy jobs, or consultancy works in your area of expertise. You may also start your own business, work more hours at your current employment, or hunt for a higher-paying position.
If you are 62 or older and own your house, consider getting a reverse mortgage. This loan will allow you to convert a portion of your home's equity into cash. You'll either get payments on a regular schedule or a lump sum that can help pay for some of your living costs when you stop working. But before applying for a reverse mortgage, you should carefully consider the terms, fees, and possible risks.
Alternatively, you could downsize to a smaller, more affordable home or relocate to a region with a lower cost of living. This will help you save money on mortgage payments, property taxes, insurance, utility costs, and more.
If you do not want to sell your home or relocate, you could rent out an extra room to generate additional income. All you need to do is study the rental laws in your area and consider the potential challenges of being a landlord.
Furthermore, to grow your net worth over time, you should invest your money.
Investing allows you to put your money in assets that could give you high rates of return. Also, stocks, bonds, and other fixed-income investments that pay dividends can give you a steady cash flow to add to your retirement income.
Of course, you could lose money if you invest poorly, but if you do it right, you have a better chance of making money than if you never invest.
But before investing, talk to a financial advisor to ensure you have a balanced plan that fits your risk tolerance and investment goals.
There are also government assistance programs that can help you save money and reduce your expenses during retirement. You can do some research to find out if you qualify for programs like Medicaid, food assistance, or utility subsidies. These programs can provide support and help you free up funds for other essential retirement needs.
It's great if you can find additional ways to make money during retirement. But, it's also essential to take proactive steps to secure your financial future. This will help you avoid any potential problems or difficulties. Instead of relying solely on supplementary income, it's wise to plan ahead and establish a stable financial base for your retirement.
So how do you do this?
First, it's essential to start saving for retirement as early as possible. Think about the kind of retirement you want and assess your retirement goals and needs.
Set specific objectives and determine how much money you need to save based on the lifestyle you want during retirement. This will give you a clear target to aim for and motivate you to save.
Most people believe that after retirement, their annual spending will amount to only 70 to 80 percent of what they spent previously. Such an assumption will result in under-budgeting, which can lead to issues down the road.
You must have a budget. This means keeping track of your expenses and making a plan for how much money you'll spend on different things and how much you'll put into different accounts each month.
This will help you stay organized, control your spending, and ensure that you're saving enough for retirement while still meeting your other financial needs.
For your savings accounts, consider opening a tax-advantaged retirement account, such as a 401(k) or an individual retirement account (IRA). Be sure to set up automatic transfers from your paycheck or bank account to your savings accounts. This makes it easier to save consistently without even thinking about it.
Furthermore, make sure to diversify your financial investments. Instead of putting all your money in one place, spread it across different types of assets. This reduces risk while increasing the possibility for growth.
While you're at it, keep in mind that some investments are riskier than others. So you must carefully consider how comfortable you are with taking risks and choose investments that match your risk tolerance. Consult a professional to assist you with selecting the best options.
Lastly, revisit and review your retirement plan regularly. As things in the economy shift and your life circumstances change, you may need to adjust your original strategy.
Today, retirement planning has become more of an individual responsibility. For millions of Americans, saving for retirement remains a daunting and confusing challenge. While some people are confident they will be able to enjoy their ideal retirement, others are concerned about what lies ahead.
Though the future cannot be predicted, you must take the necessary measures to prepare yourself for retirement. And you don't have to do this on your own.
Always seek financial advice where need be. If you are unsure how to handle your finances, consult a qualified financial advisor specializing in retirement planning. They can help you assess your situation, offer personalised guidance, and create a detailed plan to supplement your retirement savings.
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