A new study by the Employee Benefit Research Institute offers the disturbing (though not-so-surprising) insight that a growing number of Americans are expecting to postpone retirement.
Low home and stock prices are obviously factors, along with high unemployment and low rates of wage gains. It’s also likely that economic troubles have spurred many people to sit down and really think about their retirement needs for the first time, leaving them with unwelcome insights. Financial advisers and economists have known about the problem for years: Americans just don’t save enough to meet their rosy expectations of retirement.
The study found that 33% of those polled now expect to postpone retirement beyond 65, up from 11% in 1991 and 24% in 2005. Fewer people are saving, and the ranks of those who have no savings are growing. Only 16% said they were very confident of having enough money in retirement, while fewer than half had actually tried to figure out what they’d need.
While the problem has no easy solution, a three-part strategy based on better household budgeting can make a big difference. Other than winning the lottery or suddenly discovering a rich and childless missing uncle, the main way to tackle the problem is to spend less now, postpone retirement and then spend less in retirement, too.
It sounds awfully grim, but may not be nearly as painful as you think. BankingMyWay.com’s Retirement Planner shows the snowballing benefit this strategy can produce.
The planner’s default values show a 45-year-old with $100,000 socked away and an annual income of $50,000, of which 8% is saved at an 8% return. This person could retire at 65 with an inflation-adjusted income equal to 90% of his pre-retirement income. Unfortunately, he’d be broke at 73, leaving 27 destitute years if he lived to 100, the age contemplated by the plan.
Now, suppose he changed three factors. By cutting his current expenses, he saves 18% of his income instead of 8%. He plans to retire at 70 instead of 65, reducing the number of retirement years to fund and increasing the years his investments can grow. Finally, he expects to live in retirement on 80% of his current income instead of 90%.
Result: his money will last until he’s 89, which might be long enough.
In real life, the prospects may be even brighter, because the investor might well receive a Social Security benefit and might do a tad better on the investing front. Retirement expenses could be less than 70% of today’s costs if you figure the mortgage will be paid off and the kids will be grown.
Of course, a lot of 45-year-olds don’t have anywhere near $100,000 saved. But no matter how little you have now, one thing is certain: the more you put aside, and the sooner you do it, the better off you’ll be.
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