Q: I know I’m not saving enough for retirement, and a lot of my friends are in the same shape. How common is this, and what can people do about it?
Quite common. This problem is highlighted by the American Savings Education Council. The last week of February was America Saves Week, but few people are aware of this designation or are concerned about it, though they should be.
Research shows that Americans collectively are several trillion dollars short of where they should be regarding retirement savings. Various financial institutions have issued guidelines for determining the level of resources people will need for retirement. Some of these guidelines put this level at around eight times a person’s annual salary just before retirement.
Fidelity set an average target of 85 percent of your pre-retirement income, with benchmarks to measure progress toward this goal throughout your working years: your current salary by age 35, three times that figure by 45 and five times by age 55.
Of course, if you have a basic sense of math and you’ve been reading about average life expectancy and looking at your financial records, where you stand relative to these guidelines probably won’t come as a shock to you. Your poor savings habits might stem from ignoring the problem or, when you do think of it, slipping into denial. Well, denial is not just a river in Egypt. If you’re fooling yourself about your retirement resources, you’re probably rationalizing a lot.
If this describes you, you might want to examine your emotions on the subject. Are these emotions lining up to justify your lack of action to save for retirement (or your all-too-active spending habits)? If so, you might be using rationalizations such as these:
1. “Financial services companies are just trying to frighten me so I’ll invest and pay them.”
It’s true that financial advice isn’t free, but this is hardly a good reason not to adequately invest. The idea is to keep expenses low enough so you can get good investment returns after any fees.
Some investments, such as actively managed mutual funds, usually involve high fees that cut severely into your net returns. This is because investors in these funds pay investment managers to hyperactively buy and sell stocks and bonds. Not only does this produce poor longterm returns for the vast majority because these managers often guess wrong, but these managers charge excessively for this speculation. By contrast, passively managed asset-class or index funds have significantly lower fees and no speculating managers whose pockets need to be lined.
2. “I can always catch up on my retirement savings.”
Whether this is true depends on how old you are, how much money you’ll need in retirement and when you want to retire. If you’re 60 and you don’t have a dime saved toward retirement, you won’t be able to retire at 65. To avoid this situation, it’s best to design a sound financial plan at a much younger age, a plan that you stick to through firm self-discipline.
3. “I’ll just die penniless.”
The problem with this is that it’s hard to zero out precisely. If you don’t have enough money to
make it through retirement, you could become a burden to family members. And being
penniless in your twilight years is distasteful to most people because this existence lacks dignity and comfort.
4. “Somehow I’ll deal with it down the road.”
The idea is to address your saving—and perhaps your spending—habits now rather than later.
Making adjustments in your 70s and 80s is extremely difficult, and at that point, there will be little margin for error.
So think about it. If you’re fooling yourself, you should stop. That could be the first step toward changing your habits so you can assure yourself a retirement with dignity and security.
Remember: It’s never too late to do the right thing.
