(As seen on WZZM TV 13) Americans are not saving nearly enough for retirement.
In fact, nearly half of U.S. workers have saved less than $10,000 for retirement, according to an Employee Benefit Research Institute report from 2013.
In a ranking of the top 20 best retirement systems by The Melbourne Mercer Global Pension Index, the United States ranked 11th, falling behind Denmark, Netherlands, Australia, Switzerland, Sweden, Canada, Singapore, Chile, United Kingdom and Germany.
“People have done such a bad job of saving for retirement that the majority of their income is probably going to be coming from some form of Social Security benefit,” said Terry Seely, financial advisor at Capital Ideas in Grand Rapids.
Many Americans haven’t adjusted to personally taking on the burden of saving for retirement, and the live-for-today mantra isn’t helping people squirrel away money for the future. Seely said in addition to having to work longer, many people are going to need to dial back their expectations for how they will spend their retirement years to align with the resources they actually have.
It’s common for people to fantasize about spending their retirement traveling, eating out and enjoying the finer things, but in reality many people won’t have the funds to bankroll that kind of lifestyle, let alone to continue the lifestyle they are currently living.
“I don’t think you are going to find too many people who have saved enough that gives them the flexibility to do whatever they want to do. They are going to have to be more cognizant of what their limitations are,” he said.
Seely said the big question people need to ask themselves is, “How do I want to spend my retirement?”
“The focus needs to shift from how can you retire at 65 or 70, or is $1 million enough, or can you live on 4 percent a year drawdown, to more conversations about what do you want to do in retirement,” he said. “That is what people need to give some thought to.”
Considering the response to that question will provide a more realistic view of the amount of money that will be needed.
He said people also need to think about whether they want to pass assets on to the next generation or if they are planning to use up their assets during their lifetime.
Health care and assisted living arrangements are two areas that often are overlooked or at least under-budgeted for when planning for retirement.
For younger workers who are just starting to save or think about saving for retirement, Seely’s advice is to “pay yourself first.”
“I still think a realistic objective is if you can save 10 percent of your pay,” he said. “Whether that be between employee contributions and company matches, if you are able to get between 8 to 10 percent deferral, you will probably reach retirement goals and have favorable outcomes regardless of market conditions. I think you will accomplish those goals if you are looking at a 20- or 30-year timeframe.”
Aside from recommending diversification in investments of retirement savings, Seely said everyone’s situation is different, and telling someone they should be doing this or that with their retirement savings isn’t possible. But he did note the most important thing for a successful retirement outcome is the savings rate, rather than relying on the market to generate a good return.
Without a major cultural shift or some intervention that mandates saving for retirement, it’s probably a safe bet U.S. workers will continue in their inability to save enough for their retirement.
Seeley said one of the reasons Australia ranks so high on the list of quality retirement systems is because it has a mandatory retirement savings system. A specific percentage of money from each paycheck goes into a retirement plan. That mandate is making a big difference for Australians when they reach retirement.
Seeley is wary of government intervention, however, and does not think the government’s recently proposed myRA plan or other government-run retirement systems are the solution.
“I’m not in favor of that at all,” he said. “It kind of gets into the same thing — the Social Security system. Any time you’ve got the government intervening in trying to control and mandate how things are done, I don’t think it works well.”
Something he likes a lot better is for employers to become more engaged with employees about their retirement savings. He said simply offering a 401(k) plan and even a match isn’t enough.
Employees need to be made aware of how much the match is, they need to have the opportunity to learn more about their company’s retirement plan, and have a chance to sit down with an advisor and find out what sort of wage gap they will be facing in the future.
“People want their hand held,” he said.