The March results are in from Bankrate.com's Financial Security Index, which has been measuring how secure Americans are feeling, financially, since 2010. The news is generally good, with the index down a bit from the February reading but still at its second-highest level. There's some information about young Americans, though, that's less than ideal.
Here are some highlights from the survey:
- While most respondents feel about the same about their job security as they did a year ago, more than twice as many feel more secure than less secure. We can probably thank the falling unemployment rate for that.
- Most respondents feel about the same regarding their overall financial situation and believe that their net worth is about the same, too. Among those who didn't respond "about the same," many more are upbeat, finding their condition better and their net worth higher. Young people and college grads posted particularly strong positive numbers.
- Respondents are far more likely to feel the same about their debt level and their savings as they did last year, but savings have more people worried than debt.
A savings crisis
While debt is well worth worrying about, as it can wipe people out, many people are still right to be worried about their savings, because millions have socked away nothing, or close to nothing, for retirement. According to the Center for Retirement Research at Boston College, the average retirement savings for households nearing retirement (defined as those headed by someone aged 55 to 64) is about $110,000. That's rather worrisome, as it's not a sum that can support people for very long. Worse still, according to a recent FBR Survey of Consumer Finances, about 47% of people are saving close to nothing from their current paychecks. Yikes!
Obviously, those who are older with little in savings are far worse off than young people with meager savings. Still, there's something terrible going on with too many young people, financially speaking.
Young people's critical error
Check out this survey result:
- The youngest group of respondents, those aged 18 to 29, were most likely to be saving very little. A whopping 37% said they save just 5% or less of their income, while 18% save nothing. That's 55% putting very little away.
It's easy to dismiss that, if you think the way most of the young people are probably thinking: What's the rush? With decades to go before retirement, and while I'm earning relatively little compared to the higher incomes I hope to achieve in future years, why sock away anything now? There's plenty of time.
The problem is that for young people, their biggest asset when it comes to saving for retirement is all that time. A single $10,000 investment growing at the stock market's long-term average annual growth rate of close to 10% will become $67,275 over 20 years, but will top $450,000 over 40 years!
By starting to save and invest early, young people can greatly improve their eventual retirement readiness and can likely significantly reduce their future financial stress. Heck, they can even set themselves up for an early retirement.
Older Americans agree
A recent survey by Financial Engines supports that thinking. It focused on those ages 55 and up, 68% of whom said that they were late to start saving for retirement. On average, they started saving around age 35, but they thought that 25 was the right age at which to start.
Three examples from Financial Engines that really drive the point home. They assume that someone starts with a $36,000 salary at age 25, and that it grows by 1.5% per year. They also assume an average annual growth rate for the savings of 5% and 3% employer matching funds.
- The 25-year-old who saves 6% of his or her income each year will have close to $500,000 by age 65.
- A 35-year-old, starting just a decade later, will have to sock away 12% of income per year to end up with the same amount.
- A 40-year-old will have to save 16.5%.
Of course, everyone's situation is different. You might be earning less than $36,000 now -- or more. Your long-term money might grow at 8%, on average, instead of 5%, over 40 years. Your employer might have a more or less generous matching policy. (Always aim to contribute enough to max out matching funds -- that's free money!) Your income might grow by more than 1.5% over time. Any or all of these factors can make a big difference. Add in extra positive factors, such as maximizing your Social Security benefits, and your retirement can be very sweet indeed.
The bottom line is that while saving little or nothing while you're young won't doom your retirement, you're really squandering a massive wealth-building -- and financial-security-building -- opportunity.