Editor's note: An earlier version of this article incorrectly defined a 401(k) plan as a defined-benefit plan, rather than a defined-saving plan. The Fool regrets the error.
We all have a retirement finish line we one day hope to cross, but there's a big difference between putting a retirement plan down on paper and actually sticking to and implementing the various stages of your outline.
A number of factors have sacked, or continue to hamper, the retirement savings of millions of Americans, including baby boomers. For example, the Great Recession caused some people to cash out their investments after substantial losses and head for the hills. Since then, these investors have missed out on regular new stock market highs.
Additionally, the Federal Reserve has pushed lending rates to historic lows for the past six years. Although low interest rates help spur business lending, expansion, and hiring, they are notoriously bad for baby boomers and retirees who are risk-averse and looking for interest-bearing, fixed-income assets like a CD. Currently, money market accounts, CDs, and even most Treasury bonds underperform inflation, leading to real money losses.
But, if you want truly frightening statistics, look no further than the latest Employee Benefit Research Institute (EBRI) and Greenwald and Associates survey of approximately 2,000 people -- about 1,000 current workers and 1,000 retirees.
A few rays of sunshine before the storm
Before we get into the nitty-gritty of the terrifying statistics, one of the bright spots of the EBRI's 2015 Retirement Confidence Survey was that retirement confidence rose for a second consecutive year. Workers who considered themselves "very confident" of meeting their goals in retirement surged from 13% in 2013, to 18% in 2014, and again to 22% in 2015. After hovering near record lows between 2009 and 2013, this is considered a positive step.
Retiree confidence, which is historically higher than workers' confidence, also witnessed a substantial surge since 2013. Retirees who claimed they were "very confident" in having enough money for the remainder of their retirement hit 37% in 2015, up more than double from the 18% reported in 2013.
A handful of frightening retirement data
Overall, though, the data from EBRI's survey wasn't very encouraging.
Arguably, the most disturbing find in EBRI's study involves how much three out of five current workers has saved for retirement. A frightening 57% of working respondents note that excluding their homes and defined-saving plans (e.g., 401(k) plans), they have less than $25,000 saved for retirement via cash and investments. This includes 28% with $1,000 or less, and another 17% with less than $9,999 but above $1,000. Since time is the greatest ally of any worker, this lack of savings is extremely worrisome.
The fact that workers aren't saving much for retirement would be a little less terrifying if workers (including baby boomers) had the option of potentially working longer -- but this isn't always the case. EBRI's study showed that one in two people who wanted to work later in life weren't able to. A majority of these respondents cited health issues as the reason they were forced to retire, while around a quarter of those who retired listed a company downsizing or layoff as their reasoning.
Consider this: A clean two-third of workers note that they plan to work during their "retirement years," but less than one-quarter of currently retired workers report being able to work during their retirement. Be it health reasons or simply a tough jobs market that's seeking younger employees, the idea of working into your retirement years isn't a guarantee (and certainly is no excuse to delay saving for retirement).
Why aren't workers saving enough?
Why aren't workers saving enough for retirement? A lot of workers responded that their debt levels were out of control. Approximately half (51%) of all workers -- and nearly one-third of retirees -- claim to have problems paying their debt, which includes credit cards, mortgages, and car loans. Among these types of debts, mortgages tend to be the most burdensome for those who claimed it was a concern.
On top of debt, everyday expenses tend to be a major reason workers aren't saving enough for retirement. Going out for food, entertainment such as heading to the movies or renting DVDs, and buying lottery tickets are all reasons why workers acknowledged that they aren't saving enough money for retirement. In fact, 69% of workers admit that they could be saving $25 more per week for retirement over what they're currently saving.
However, half of those respondents simply don't have the capacity to boost their retirement savings by $25 per week because of debt and everyday living expenses. If workers were able to save $25 more per week, they'd be able to add $1,300 per year to their retirement accounts. Assuming a worker began saving $25 per week at age 18, and this practice continued through age 67 (the full retirement age for current 18 year olds) -- and assuming the stock market continued to average 8% returns per year (which is what it's historically returned) -- upon reaching full retirement age, our fictitious investor would have $492,440! That's not chump change!
Take charge of your retirement
The first step workers need to take in order to secure their financial future is to determine approximately how much they'll need to save to retire how they want. EBRI's study showed that 48% of workers hadn't determined how much they'd need to retire.
Of course, simply setting a retirement figure and putting aside a certain amount of money each year, month, or even week, may not be enough. The reason is that our lives are dynamic, and changes do happen, meaning we need to review our retirement goals on a somewhat regular basis. From buying a home to sending kids to college, life's expenses do arise, and our retirement plans should be adjusted to reflect these shifts.
Secondly, and I believe this goes without saying, based on the above example of saving $25 per week, the earlier you start saving, the earlier you can use the power of compounding interest and gains in your favor. Keep in mind the above example didn't include the effect that dividends could have on your investment gains as well. As a crude example, a dividend yield average of even 2% could more than double your money between the age of 18 and 67, and if reinvested, you could really supercharge your gains.
Third, workers need to ensure they're keeping as much of their investable gains as possible, which means employing the use of tax-advantaged retirement accounts. Workers should try to match employers' 401(k) contributions to ensure they aren't leaving free money on the table. Furthermore, opening an IRA could be one of the smartest ideas a worker or retiree can make. A Roth IRA, for example, allows investments to grow completely tax-free, and retirees aren't required to take their distributions by any specific age, giving them the option of allowing their nest egg to continue to grow.
Lastly, it's important that workers and retirees focus on living within their means. If you aren't saving for a yacht, you shouldn't plan on buying one when you retire. It's a good idea to try to live pre-retirement as you'd like to live post-retirement, so there's not only an easy transition, but also a good idea of what your expenses might be like during retirement. Formulating a livable budget during your working years could make for a reasonable budget you can live off of during retirement.