Though we all walk a different path, Americans typically have one common goal: to retire comfortably and on our own terms. Once we hang up our work coat for good, we don't want to have to worry about money ever again.
However, the grim reality for a growing number of Americans is that retirement, or a comfortable retirement, may be out of reach. A number of factors have plagued consumers, leading to the "retirement problem" we have on our hands today.
Here's why Americans are struggling to reach the "finish line"
What problems, you wonder? For starters, most Americans aren't saving anywhere near the recommended amount of their income for retirement. Most financial advisors recommends socking away 10% to 15% of your annual income for retirement. According to the St. Louis Federal Reserve, the average personal savings rate in April was just 5.3%, which is less than half of the 11.7% being saved by Americans in April 1967. With little in savings, Americans are having to be masterful investors in order to build their nest egg large enough to retire comfortably.
But herein lies another issue: most Americans aren't good investors. Quite a few have been scared out of the stock market post-Great Recession, causing investors to miss out on the stock market's surge to new all-time highs. A Bankrate study released in July of last year found that 54% of Americans weren't invested in stocks, including two-thirds of all millennials.
Another clear issue is debt. Consumer credit debt recently topped the $1 trillion mark -- and student loans and auto loans already topped the trillion-dollar debt mark. The more debt consumers take on, the less money they'll have to set aside for their retirement.
And, of course, there are certain expenses that are rising at a blistering pace. For instance, healthcare costs have risen at a quicker pace than Social Security's cost-of-living adjustments in 33 of the past 35 years. Similarly, the cost of a college education has outpaced inflation in practically every year since the 1970s.
The end result is we have multiple generations of Americans worried about retirement.
Here's what Americans fear about retirement (hint: it's mostly money-related)
What exactly worries them the most? This was a question that GoBankingRates sought to find out in its recently released survey. GoBankingRates asked more than 1,000 adults across the U.S. which of the following six answers best represented their greatest retirement fear:
- Never being able to retire
- Not being able to afford healthcare costs
- Suffering from boredom
- Not being able to afford my lifestyle
- Losing access to Social Security benefits
- Not having anyone to enjoy retirement with
And the results (which don't add to 100% due to rounding):
- Not being able to afford my lifestyle: 25%
- Never being able to retire: 24%
- Not being able to afford healthcare costs: 19%
- Suffering from boredom: 13%
- Losing access to Social Security benefits: 9%
- Not having anyone to enjoy retirement with: 9%
You'll note that with the exception of those who fear suffering from boredom, and those who fear not having anyone to enjoy retirement with, 78% of the remaining respondents, nearly 4-in-5 people, have a direct money-related concern.
More interestingly, respondents appear to have unique concerns. For instance, not being able to afford their lifestyle sounds an awful lot like a budgeting problem or a lack of tax planning, while not being able to retire sounds like a mixture of a budgeting problem and failing to invest wisely. Essentially, most of these problems could be erased or seriously abated with some simple budgeting, investing and tax-planning!
If there is a headscratcher here, it's the 9% who fear losing access to their Social Security benefits. Social Security is certainly facing some struggles in the decades to come -- the Trustees report from 2016 is forecasting an exhaustion of the Trust's spare cash by 2034 -- but it's incapable of going bankrupt. The vast majority of Social Security's funding comes from payroll taxes on working Americans, meaning that as long as people keep working, the program keeps collecting revenue that's then dispersed to eligible beneficiaries. While benefit cuts aren't out of the question, Social Security will be there, in some form, for Americans when they retire.
Repeat after me: budgeting, investing, and tax-planning!
As noted above, Americans aren't good savers relative to other developed countries. The reason for this is likely because just 32% of polled survey-takers in a 2013 Gallup poll were keeping a detailed household budget each month. Without a budget it becomes nearly impossible to understand your cash flow, which in turn makes it difficult to adjust and/or optimize your ability to save.
The good news is it's easier than ever to formulate a budget since the software to do so can be found online, and in many cases for free. If you know how much you want to save monthly or annually, inputting this information into the online software can help you generate a plan.
Sticking to your plan could be a bit more challenging. While there are numerous tips that could help, some of the more effective solutions include setting up an automatic withdrawal each month to a savings or investment account to keep you honest to your budget. Also, consider using cash to coax smart spending habits, since the loss of cash from your wallet is tangible and may make you rethink impulse purchases. Finally, get everyone in your household involved, or consider meeting up with a group of likeminded people once or twice a month to stay on track.
Secondly, Americans really have to get over their distrust of the stock market. While we have witnessed two of the wildest swings in recent memory over the past two decades (the dot-com bubble and Great Recession), the stock market has nonetheless motored to new all-time highs.
In fact, Yardeni Research's data has shown that despite 35 stock market corrections in the S&P 500 since 1950 of at least 10% (when rounded), these declines have often been eradicated within weeks or months. More importantly, in all 35 cases bear markets or corrections lose to bull markets or rallies. History says you should buy high-quality companies and hold them for long periods of time, and 35-for-35 is pretty hard to argue against. With a historical return of 7%, including dividend reinvestment, the stock market is tough to beat.
Finally, it's always a good idea to think about taxes prior to retiring. Some aspects of tax-planning are incredibly simple. For example, pre-retirees should take the time to examine the treatment of retirement income in the city, county, or state they plan to retire. Every state offers a different amalgamation of taxes, and 13 states may even tax a portion of your Social Security benefits. You should do this homework ahead of time so that you aren't surprised during retirement.
However, Americans really need to be taking this time to find ways to shelter their income for retirement. For some, it could be something as simple as maximizing their employer-sponsored 401(k). Even though 401(k) withdrawals are taxable, the money within a 401(k) can grow on a tax-deferred basis, which is great news for most workers. For others, a Roth IRA might be a smart consideration. Although income limits apply for Roth contributions, money within a Roth is considered after-tax, and thus can grow tax-free for life. In other words, it won't count toward your income during retirement.
Repeat after me: budgeting, investing, and tax-planning! You can do this.