Photo: GeorgHH. Source: Wikipedia
We often hear that there is a retirement crisis in this country. People aren’t saving enough today to fund their retirements tomorrow. Our national savings has declined from 10% in the 1980s to around 2.5% now. And if you save 2.5% of your salary for 40 years and put it in the bank, by the time you retire you’ll have set aside an amount equal to your salary. That’s not enough to retire, even after you add in whatever Social Security benefits you’re due. But everyone knows that Social Security payments will also be at risk in a few years.
Source: St. Louis Fed
But how we get to the savings rate we need? A recent analysis showed that people need to set aside 20% of their salary and invest it reasonably – not aggressively, but folks need to earn more than 1% per year. If we do that, a 40-year career should be enough to fund a 20+ year retirement. And the national savings rate data are a bit misleading. Our life-cycle earnings and personal savings rate peaks between ages 50 and 60 at much than the national averages, after the kids are out of the house but before retirement. But it’s also hard to set money aside when our tax-code punishes any kind of personal prudence. And saving 20% can seem like an impossible task.
But we need to face the future honestly. Our options for retirement if we don’t set aside enough money are actually pretty clear: work longer and don’t retire; work harder, taking a second (or even third) job while in our ‘50s; or reduce our expenses by moving in with the kids. When people see their alternatives put into such stark relief, it’s not so hard to save.
Douglas R. Tengdin, CFA