Saving for retirement requires discipline -- and let's face it, this is a department where Americans are sorely lacking. With consumption comprising about 70% of our annual GDP, U.S. personal savings rates are regularly well below those of our developed peers, such as France and Germany. This lack of savings leaves Americans in a precarious situation come retirement, with far too many in danger of outliving their retirement nest eggs.
A majority of Americans could be in big trouble during retirement
But getting a good bead on how well or poorly Americans are actually saving isn't always easy. For that we'll turn to the recently released Planning and Progress Study 2016 from Northwestern Mutual (specifically, "The Financial States of America"). This online study, conducted in early February, included more than 2,000 adults from across the U.S., as well as an oversample of 620 interviews with millennials aged 19 to 35. The goal of the Planning and Progress Study every year is to get an all-encompassing picture of how pre-retirees are preparing for retirement, including what actions they've taken to increase the size of their nest eggs. The results in this years' study weren't very encouraging.
With the exception of a healthy amount of respondents expecting their financial situation to improve in 2016 (46%) relative to the U.S. economy improving (31%), the remaining data suggests that baby boomers, generation X, and millennials could struggle during their golden years to meet their financial needs.
For example, the study asked the following question to respondents, supplying them with six percentage ranges to choose from, as well as the always popular "I don't know" option:
"In your opinion, what is the likelihood that you could outlive your savings?"
Based on the responses, just 11% felt there was absolutely no chance they were going to outlive their savings. An additional 20% simply had no clue, and chose "I don't know." This means the remaining 69% of respondents (more than two-thirds!) believes that there is at least some chance that they'll outlive their retirement savings. This includes 34% of respondents who believe they have at least a 51% chance of outliving their savings. One-in-seven respondents felt there was a 100% chance they would outlive what they'd saved up.
And that wasn't all.
Northwestern Mutual also asked respondents the following question, again giving respondents 11 options to choose from:
"What steps, if any, have you taken to address the possibility that you may outlive your savings?"
A terrifying 44% of respondents told Northwestern Mutual that they had not taken any steps to improve their financial situation so as to not outlive their money. Comparatively, only 21% had increased their savings, 17% had purchased investments, and a mere 12% had conducted research or searched for further information.
When questioned about Social Security reliance, the responses were also pretty dicey. Just a quarter (24%) believe that it's extremely likely Social Security will be available when they retire, while another quarter (24%) don't believe the program will still be around when they hang up their work gloves for good. Furthermore, 35% of respondents expect Social Security to be their sole source, or primary source, of income during retirement.
From top to bottom, not a very encouraging outlook. Northwestern Mutual pegged these struggles on rising healthcare costs, an overall lack of savings (for which debt levels played a key role), and an overall lack of retirement planning, which is evidenced from the second question in the survey above.
Lacking education in three key areas
What stands out most from the Planning and Progress Study is that Americans are sorely lacking the core fundamentals needed to get the most out of their budgets, their investment accounts, and Social Security.
For example, just 21% of respondents stated that they'd increased their savings in an effort to extend the life of their nest egg. This is a disappointingly low statistic that implies Americans aren't saving optimally (more than likely because they haven't been taught how). Gallup confirmed this in 2013 by noting that only a third (32%) of American households prepared detailed monthly budgets. Unfortunately, failing to keep up on your income and expenses makes it nearly impossible to understand your cash flow and improve your saving habits.
Last week we examined nine specific tips that people of all ages could employ to take their ability to save to the next level. These tips include a number of important points that'll dramatically improve your chances of truly optimizing your saving. Using budgeting software to handle the hard calculations, direct-depositing what you save into an investment account on a recurring basis to avoid the temptation to buy unnecessary things, and setting specific goals that allow you to measure your progress are some of the more important ways you can boost what you're saving for retirement.
It's also pretty evident that Americans don't have a good grasp of the power of investing and compounding, because if they did we'd have seen more than 20% putting together a financial plan and more than 17% purchasing investments. The stock market has historically returned about 7% annually, including dividend reinvestment (i.e., purchasing more shares of dividend-paying stocks with dividends received from stocks you already own), meaning investing in stocks over the long run could lead to your money doubling four or five times over during your lifetime, if not more. The key is starting early. Let's look at an example.
Utilizing Bankrate's investment calculator with the assumption that your money has an annual rate of return of 7%, and that you'll make $1,000 contributions per quarter for a period of 45 years (let's say ages 20 through 65), you'd have $1.17 million before taxes and inflation by retirement.
Now let's say you invested $1,000 quarterly with the same return rate, but you chose to wait until age 30 to begin putting money toward your retirement. Under this assumption, with 10 fewer years of savings under your belt, you'd only have $567,000 in your retirement account. That extra decade of savings can mean the difference between having enough money to retire and outliving your nest egg. And remember, we're living longer than ever these days, with the average 60-year-old having a life expectancy of more than two decades, so starting to invest early is especially important.
Lastly, it's important that Americans have a better understanding of the Social Security program. We can start by nipping the biggest Social Security myth in the bud: namely that the program won't be there when you retire. Although Social Security is on track to burn through its excess cash reserves by 2034, according to the latest report from the Board of Trustees, it's not going bankrupt. Should Congress fail to pass new legislation to bring in more payroll tax revenue, or to cut benefits, a benefit cut for Social Security recipients of up to 21% could be needed by 2034 to sustain the program for up to 55 more years. While no one wants to see this cut take place, the program will be there to pay you benefits when you retire.
However, it's also disconcerting that slightly more than a third (35%) of respondents plan to heavily rely on Social Security during retirement. It's scary that a possible double-digit benefit cut could be in the offing within two decades, and it's all the more reason for Americans to have a firm Plan B in place when it comes to income.
No matter what path you take, just remember that the only one responsible for keeping your retirement on track is you, so make sure you're being proactive about meeting your retirement number and aim high.