Seventy-seven million Americans plan to retire over the next 20 years, portending a veritable tsunami of Baby Boomers who will need to live off of their savings. Sadly, many of these individuals are woefully unprepared.
According to the most recent survey by the EBRI (Employee Benefit Research Institute):
- Only 14% of Americans are confident they will have enough money to live comfortably in retirement.
- Sixty-seven percent of workers state that they are “a little or a lot behind schedule” on their retirement savings.
- Seventy percent of workers report having less than $50,000 saved for retirement.
Most of us were never educated on the basics of personal finance and have not made savings a priority. The financial crisis and ensuing lackluster economic recovery have decimated investment portfolios and instilled a fear of the stock market in many minds. Fears of lower future investment returns, future inflation due to the soaring balance sheet of our nation, and escalating costs for medical and long term care, create further consternation. Retirees want to make their hard earned pay last throughout their lifetime, which may stretch beyond a century. But if they aren’t working toward this end, they will be in a tough financial spot in retirement, possibly relying on their children or other social services to subsidize their basic expenses.
What can be done to prepare for this uncertainty and to make up for our lack of savings?
It is essential that we ramp up our savings in a big way.
We do not have control over the financial markets or inflation but our cash flow –how much we spend compared to how much we save– is the one thing we do have control over. The older you are, the more likely you will need to substantially increase your savings rate, especially if you do not have any significant savings.
Over the years, the savings rate for Americans has plunged. In the 80’s, the personal savings rate was in the double digits. More recently, except for a brief period after the 2008 financial crisis, it has been consistently lower than 5%.
Compare that savings rate to those of other countries. European countries like Germany, Sweden, Portugal, and Spain have savings rates in the range of 10-12%, while Asian countries like India and China boast savings rates that approach 30%.
To help motivate you to increase your personal savings, here are six tips to consider:
1. Determine how you want to live in retirement. Develop a clear vision of your future self when you are 60,70,80 and beyond.
Studies show that when we think about our future self when we make decisions about our money we conscientiously make the decision to save more.
- Create a clear image of what your will be doing in retirement, where you will be living, where and how often your will travel, and what activities you will be engaged in.
- This mental preparation help you keep an “eye on the prize,” so the speak, by making the future more real.
- Create a collage, if you can, of all the pictures that remind you of your vision of retirement, and keep it somewhere visible so you can stay focused on your future goals and committed to your savings plan.
2. Pay yourself first. If you are not already, contribute to your company’s retirement plan.
- According to the EBRI, those who do participate have a greater chance of having saved at least $50,000 for retirement.
- If you are currently contributing, increase your savings rate gradually over the next few months/years.
- Be sure to contribute at least enough to get your full employer match. Otherwise, you are leaving free money on the table. If an employer matches 100% of the first 3% of your savings, that would be a guaranteed return of 100% for your contributions. Even if they offer 50% of the first 6% you contribute that would be a 50% instant return on your money. There is no other investment I know of that provide that guaranteed investment return!
- Set a minimum goal of increasing your rate by 1% at least every year, with a total savings rate goal of at least 15% of your gross salary, including your employer contribution.
3. Create a value-based budget.
- Make sure your spending plan is prioritized based on the important values and goals you determine along with your spouse or family. Reevaluate your spending needs and wants with respect to these core values.
4. Try to delay gratification.
- We can spend now or save that money to spend more in the future. Think before you buy, and ask yourself if you want to sacrifice a secure future, for a quick purchase today.
5. Don’t try to keep up with the Joneses.
- The Jones family may have a big house, big car, but you know what else they have—big bills.
- Try to buy things only if you have the money for them. Do not take on any bad debt like high interest credit cards, car loans and excessive student loans.
6. Determine how much you will need in savings for retirement.
- Only 42 percent of workers report that they have attempted to calculate how much savings will be required by the time they retire. Most only guess what they will need, and that is often a very low number, which may only just cover medical costs in retirement.
- Those who do the math, tend to have higher savings than those who do not, so you may want to work with a fee-only planner who specializes in retirement planning. He or she will help you determine how much you will need to cover your living expenses after taking into account your Social Security and pension income and lifestyle in retirement. The planner can help you determine additional funding sufficient to cover medical costs and long term care.