By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
- Forrester Research predicts that the average American will hold nearly 12 different jobs during his or her lifetime.
- According to the Social Security Commission, if you are still alive at age 65, your average life expectancy is 84 for males, and 86 for females.
It has been said that successfully funding a retirement nest egg is the largest purchase that the average American will make. It is far bigger than any house purchase decision you will make.
If you started your work career 60 or 70 years ago the work and retirement savings opportunities were very different. Back then it was much more likely that you would work for fewer employers and you would be covered by a defined benefit pension (DB) plan through your employer. DB plans were fully funded by employers and retired employees received a monthly income based on the number of years they worked for the business and their salary in the years before they retired.
Building up enough retirement savings to live comfortably for 20-30 years (or more) after retiring is an achievement that relatively few of us will make. Building a retirement nest egg is not a single purchase, but a series of decisions that most of us make throughout our working lives. Each employer that you worked for, hopefully, had a retirement plan with investment opportunities. The most successful retirement savers worked diligently to take advantage of the retirement plan offering of each employer, and if an employer didn’t offer a retirement plan, then they diligently saved outside the plan to better prepare for retirement.
As of June 2013, about 88.7 million Americans participated in 401K or other defined contribution retirement plans through their employers according to the American Benefits Council. The great majority – 77.7 million of these participants – were active employees. About 80% of all full-time workers participated in these plans. That means that 15 million employees were not participating in their company’s retirement plan.
In a recent survey by BlackRock, Baby Boomers age 55 to 64 said that they expected to have about $45,000 per year in retirement, but the amount that they had saved for retirement would only provide a little over $9,000 per year.
Why is this?
I am sure that there are many different answers, but are a few that make most sense to me.
- More than ever we have a “live for now, spend for now” culture. Technology now makes it easy to see your friends, fellow employees or relatives going on adventures and consuming. This encourages you to spend now and save later.
- Many Baby Boomers didn’t feel they made enough money to feel comfortable saving part of it in a retirement plan. For them their known financial needs of today were more important than the unknown financial needs of tomorrow.
- Most of us have no understanding of the amount of the retirement savings goal that we are trying to achieve. Most 25-year olds couldn’t tell you how much they will need to live on when they retire in 40 or more years. Instead, they are dealing with the financial issues they face today: record levels of debt coming out of college, high housing costs, the prospect of later marriages and lower rates of child bearing because of the very high costs of childcare. They don’t know how to begin to invest for retirement, where to invest their retirement assets or what the outcome of their saving might be in 40 or more years.
- As retirement account balances have increased, many Baby Boomers have equated investing these balances to gambling. They are concerned that the financial collapse of 2007-2009 will happen again. To manage this fear, they have felt more comfortable keeping much of their retirement balances in cash, rather than invested.
These decisions, combined with the elimination of many defined benefit pension plans, are making Baby Boomers the least well prepared group for retirement ever. Many will be forced to start Social Security at age 62, and will live with very modest savings for the rest of their lives.
In my next post I’ll review some suggestions for today’s 401K participants to follow to increase their chances of achieving financial security.
~ Brooks, Hughes & Jones Wealth Advisors — Gig Harbor, Washington