While many of us work away at putting money away for retirement, we do so without a real sense of what we will need. When we look at how we are doing, the numbers are terrible.
It is no secret that Americans really don’t put as much into their retirement as they should. Perhaps we have some vague sense of needing to save a certain amount to be used then, and then take our income and devote a certain percentage of it toward retirement savings, and then hope that we will be able to get by with that.
When we look at the numbers here, the report card for how well we measure up here in general, they are quite disturbing. We can’t just look at averages here, even though when we do, it still doesn’t come out looking that great. Averages allow super-savers to skew the results though.
We can see how much of a difference this makes when we compare the average retirement savings of American families, where we add things all together and divide by the number of families, with the mean amount, where half of people are above this line and the other half are below it.
As we know, wealth is far from evenly distributed, and those on the high end of this have some pretty big numbers indeed to show, similar to what we see with the top 1% having more wealth than the bottom 90%.
The distribution of retirement savings isn’t quite as skewed as that, but enough to make a real difference when we compare the average and the mean. The average savings for a family aged 56-61, those close to retirement, is $163,000 for instance, which may not seem like that terrible of a number actually.
This is not a number that your financial advisor will tell you is anywhere close to where a family needs to be to retire comfortably though. The after-tax returns of this at a growth rate of 6% would provide only a little more than $7000 a year, nowhere near enough to fill the gap that is created by retiring, especially since we’re often talking about two income earners each experiencing a gap.
If returns get diminished over the next while, as they are predicted to do, where we may have to get by with 2-3% market returns on average, this number gets cut in half or more. $2,500 a year extra for a family really isn’t going to do very much, and this is going to set us on a course to spend our principal away and be left broke well before we pass on.
Looking at the Mean is Where Things Really Get Ugly
The alarming thing about all this is that we’re using the highly skewed statistic here, and the real one is much scarier. The mean amount of retirement savings for families aged 56-61 is actually only $17,000. This is not a matter of not being able to generate enough investment income to fill the gap or even close it meaningfully, this might only be one year of a reprieve and that’s the end of it.
While many people have zero retirement savings, having $17,000 saved up is so close to nothing that we can group these two in the same category of little to nothing and not an amount that is even meaningful. When that’s the majority of people, you know that you have a real problem.
It’s not that this age group has lagged, as these are the people who have prepared the most. The 50-55 group only has a little more than half this saved up, and the mean amount is only $8000. People 44-49 have stashed away $6200, those 38-43 have managed $4200 thus far, and people aged 32-37 are getting started with just $420.
The people with the $420 have the best chance actually, since they have so much more time to change their ways than those whose retirement is much closer. Getting started in your 30’s, and only having $420 would certainly be considered just getting started, is well beyond the point where people need to get started on this seriously, if they really want to be comfortable in retirement that is, but at least there’s plenty of time left to save.
We Don’t Even Realize We Have a Big Problem Here
These numbers are simply atrocious. Some people may be OK here, those on the further end of this scale, but we know from this alone that the majority of Americans are not set up for success in retirement, they are instead well set up for failure.
It used to be that people would rely on pensions they received from work to supplement their social security benefits, and the pension would be there for them when they retired and they would be assured at least a minimally acceptable lifestyle, for the rest of their lives.
We’ve moved away from that model now, and placed the responsibility in the hands of the people, and the results have been simply ugly. While employers have saved a lot of money no doubt, most of them still are willing to kick in big amounts to help us like they did with the pensions, but they now leave it to us to decide how much.
The natural tendency for people is to choose the present over the future, and in a culture where choosing the now is so prevalent, where we have such a strong bias toward spending and enjoying our income now over saving it for when we need it later, this was a disaster just waiting to happen.
We’re not only not taking full advantage of these employer contributions, a lot of us don’t even know how this all works. It doesn’t matter that much if you aren’t going to bother with this very much though.
The most surprising thing about all of this is when we poll people to get an idea of how they think that they are doing and what sense of urgency they may have. Three-quarters of people believe that they will be able to retire comfortably. Since we know from looking at the statistics that most people are in horrible shape currently, they must be planning something really special going forward to catch up as much as they need to, which is a lot.
This is probably not the case with most people as two-thirds think that they are doing just fine right now. If the mean points to failure, then we know that most of these people are simply wrong and are pretty disconnected with reality actually.
The fact that social security benefits are going to be reduced at some point just adds to the problem, where the minimal safety net that we have gets lowered, and if that’s all you have to live on, you are headed for real trouble indeed. If and when the bear market comes, this will make it even more challenging to catch up, or to get people to even save as little as they do now, with the stock market in decline.
When we use calculators to determine how much we’ll need to have put away once we retire, we see numbers seven figures long, as in over a million dollars. This is the amount to retire comfortably. Anything beneath this indicates degrees of financial discomfort, and numbers very low mean a lot of it.
The first step is to take an honest appraisal of where we are really at with this plan, and then see how we can manage to set aside more to at least cushion the blow more. Every little bit does help.