Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
The greatest dangers in life aren’t always the most obvious or dramatic. What do you suppose causes the most car accidents? Drunken driving? Texting while driving?
Neither. Under-inflated tires — the result of not tending to a slow leak — are the biggest culprit.
Americans face a similarly insidious danger on the road to financial security. Our retirements are terribly under-funded. And that’s going to come back to haunt both individuals and the nation if we don’t do something about it.
The savings rate in America was nearly flat for much of the 2000s. Americans failed to save for retirement and took on a level of debt that will take years to pay off. The result: 30 percent of workers surveyed in a study this year said they had less than $1,000 saved or invested toward retirement. And just 14 percent of us are very confident we will have enough money to live comfortably in retirement.
As if that wasn’t bad enough, other traditional sources of retirement income are disappearing or endangered:
– Only about one in five retirees today has a pension, according to a recent Wall Street Journal article.
– Investment returns have been well below historic norms. From 2000 through 2011, the S&P 500 barely managed a 2 percent annualized return, even when counting the reinvestment of dividends. Compare that to the 9-plus percent it has averaged since the 1920s.
– The Social Security trust fund is forecast to run out of money in the not too distant future, perhaps as early as the 2030s, potentially leaving all retirees with a significant reduction in monthly income. This is especially troublesome for low-wage earners, for whom Social Security replaces 40 percent of pre-retirement earnings.
Furthermore, life expectancy is soaring, which means whatever money we do save needs to last much longer.
Before resigning yourself to a retirement diet of cat food and water…
The answer to this problem is simple — but not easy. Americans need to save more now, and/or need less in retirement. Instead of the traditional 10 to 12 percent in recommended savings, we need to save between 15 and 25 percent of our gross income. This requires a sometimes painful prioritization of our TSL spending order: Taxes, Savings and Life.
If 30 percent goes to taxes and 25 percent toward savings, that leaves just 45 percent of our gross income to spend in our pre-retirement years.
I see your jaw hanging open. But this goal can be achieved with enough discipline, planning and work.
If motivation is still an issue, think about this: Nearly 75 percent of retirees surveyed recently said they don’t have enough money to live comfortably and wish they had saved more during their working years.
So don’t be a statistic. Start pumping up your retirement tires today.
How does your TSL spending order stack up? What steps would you advise someone — say, a nephew in his 30s and a cousin in her 50s — to boost their savings levels?
– Wes Moss, for AJC Atlanta Bargain Hunter blog