Why is saving for retirement so hard?
We often hear that there is a saving crisis. People don’t save enough today to fund their retirement tomorrow. And with the national savings rate somewhere around 5%, that seems pretty accurate. After all, if you save 5% of your salary for 40 years—and just put it in the bank—by the time you retire you’ll have only two times your salary socked away. If you spend 5% of your savings every year in retirement, you’ll only replace 10% of your final salary.
Personal Savings Rate—the different between Personal Income and Personal Consumption. Source: FRED
For most folks, that’s not enough. People want or need something more like 70% of their final salary to retire comfortably. But how do we get there? Social Security only replaces some of that need. A recent analysis indicates that by setting aside 20% and investing it conservatively, a 40-year career should be enough to fund a 20+ year retirement. And our 5% national savings rate is a bit misleading. Life-cycle savings peaks between ages 50 and 60 at a much higher rate—after the kids are out of the house but before retirement. But it’s hard to set more aside when the tax-code punishes prudence.
The alternatives to saving more are clear, though: work longer—don’t retire; work harder—take a second job; or cut expenses by moving in with your parents—or kids. When we see these choices, it’s not so hard to save.
Douglas R. Tengdin, CFA
Chief Investment Officer