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Wake Up! This Is Your Financial Wake-Up Call

By Selena Maranjian - Jul 21, 2019 at 9:00AM

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There's a good chance you're headed for financial disaster -- unless you take some critical steps now.

Take a moment to think about what kind of financial shape you're in. Are you deep in credit card debt? Have you been saving for retirement -- or just coasting along, assuming that Social Security and Medicare will take care of you? Are you living below your means -- or beyond it?

If you're like millions of Americans, there's a lot of room for improvement in your financial life, and you'd do well to change your ways -- pronto. Consider this your financial wake-up call -- and share it with any loved ones who also need to be financially "woke."

We see a woman in bed grasping her alarm clock with her mouth wide open in shock and alarm.

Image source: Getty Images.

A sorry state of affairs

To set the stage for this wake-up call, check out the following statistics:

  • Only 23% of Americans report carrying no debt, according to Northwest Mutual's 2018 Planning and Progress study. And among those with debt, the average personal debt load (excluding mortgages) was a whopping $38,000.
  • In addition, 60% of workers say their level of debt is a problem, and 19% of workers say it's a major problem, per the 2019 Retirement Confidence Survey (RCS).
  • Thirty-nine percent of Americans don't have the funds available to handle a $400 unexpected expense, per the Federal Reserve Bank. They would resort to charging it on a credit card; borrowing from a friend, relative, or bank; selling something; simply not paying the bill; or some other unattractive option.
  • As of 2016, fully 48% of households headed by someone 55 or older had nothing saved for retirement, per the U.S. Government Accountability Office.
  • Only about 60% of American workers had access to a defined contribution retirement plan such as a 401(k) at the end of March, 2018, and only about 71% of those folks participated in it, according to the Bureau of Labor Statistics.
  • Forty-three percent of retirees retired earlier than they had planned to, most often due to a job loss, health issue, or disability, per the 2019 RCS. This means they ended up with less time to save for retirement and their retirement funds had to last longer.
  • One out of every three 65 year olds today will live past age 90, while one in seven will live past age 95, according to the Social Security Administration. That translates to retirements that last more than 25 or 30 years for those folks and it's a long period in which to have to support yourself.
  • A healthy 65-year-old couple retiring in 2018 will face average out-of-pocket costs of $363,946 for healthcare in retirement, per HealthView Services' 2018 Retirement HealthCare Costs Data Report. That sum includes Medicare premiums and the cost of supplemental insurance, but not long-term care -- and remember, that's for healthy retirees. Many people will face even steeper costs.
  • The sum we need to save for retirement is different for everyone, but the folks at Morningstar.com estimated that a retiree who wants to generate $40,000 a year in retirement for 30 years will need savings of about $1.18 million. (Assumptions included average returns of 6% and inflation at 2.5%.)
  • The average monthly Social Security retirement benefit was recently $1,471. That amounts to about $17,652 per year.

Why this wake-up call is urgent

Clearly, millions of Americans are in dire need of a wake-up call. The statistics above tell us that:

  • A comfortable retirement will require substantial savings.
  • Social Security alone isn't likely to provide as much income as you want or need.
  • Healthcare is likely to cost a lot over the course of a retirement.
  • Retirement may well start sooner than expected and last longer than expected for many people.

The wake-up call is urgent because, though many of us are not well-positioned for a great retirement right now, there's likely still time to improve our situation -- if we act now. The table below shows how much you might amass, depending on how far from retirement you are, if your money grows by an annual average of 8%:

Growing at 8% for

$10,000 invested annually

$15,000 invested annually

$20,000 invested annually

3 years

$35,061

$52,592

$70,122

5 years

$63,359

$95,039

$126,719

10 years

$156,455

$234,682

$312,910

15 years

$293,243

$439,864

$586,486

20 years

$494,229

$741,344

$988,458

25 years

$789,544

$1.2 million

$1.6 million

Source: Calculations by author.

Unfortunately, the stats also show that not only are many people way behind on saving for retirement, but if they would have trouble paying an unexpected $400 bill, they're probably not in a great position to be able to save much for retirement.

The words wake up are printed on a white strip against a yellow background.

Image source: Getty Images.

Steps to take to strengthen your finances

Even if you're financially strapped right now, perhaps deep in debt, there are steps you can take to bolster your future financial security. Here are some key moves to make:

Get out of debt: No matter how much you owe, you can succeed in paying off a lot of debt. (Here are six reasons why you should make doing so a priority.)

Develop a plan: Take the time to estimate how much income you'll need in retirement. You can use that number to calculate how big a nest egg you'll need for retirement. Here's the math: If you figure you'll need $60,000 annually in retirement, you might see that you will have $25,000 coming to you from Social Security, so you'll need to come up with the difference -- $35,000. Using the 4% rule as a rough guide, multiply $35,000 by 25 and you'll arrive at a needed nest egg of $875,000 (25 is the inverse of 4%: 4% is 4 divided by 100, and 25 is 100 divided by 4).

Start saving aggressively: Once you know how much you'll need by when, you can start figuring out how much to sock away each year. Be aggressive and disciplined about it. The folks at Vanguard recently reported that the median 401(k) contribution of American workers is 6% of pay -- which approaches 10% when you add in the median company matching contribution. That's not enough for most people, though, especially those who aren't starting to save for retirement while they're still young. Vanguard recommends a total contribution rate of between 12% to 15% of salary -- and many people may need to be socking away more than that, depending on how close to retirement they are.

Save more and spend less: You might need to take on a side hustle to generate more income, at least for a few years. At the same time, you can save significant sums in lots of ways, such as by quitting smoking, exchanging a gym membership for exercising at home, cutting the cable cord and switching to one or two streaming services, and so on.

Invest effectively: You don't have to become a stock market genius all of a sudden. You can get great results with long-term money by just sticking with low-fee, broad-market index funds for much or all of your investing. One good example is the SPDR S&P 500 ET, which distributes your assets across 80% of the U.S. stock market. Index funds have a long history of outperforming stock mutual funds managed by Wall Street pros, and even super-investor Warren Buffett recommends index funds for most investors.

It's within your power to give yourself a more comfortable and secure retirement -- and possibly a much better one. So don't just coast through life assuming that all will be fine in retirement. There's a good chance it won't, unless you take this wake-up call seriously and start taking some powerful steps in the right direction. Revisit the table above that shows how much you can amass over time -- and let that inspire you.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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