Importance of Savings

Just heard a good (but scary) segment on Mark Belling’s show on 1130 WISN.The segment discussed how unprepared many of today’s seniors are for retirement.

According to research from the Center for Retirement Research, the median 401(k) balance for households headed by people aged 55 to 64 who had retirement accounts at work was $120,000 in 2011.1 If these households were to withdraw the “safe” 4% amount annually, this would come to $4,800. If one invested in a dividend portfolio averaging 4%, this would be slightly better because the underlying assets would not have to be sold. It still would not be an adequate amount to live on, however. Add in the paltry average of $18,000 held in financial assets outside of a house, pension, or 401(k) and things really don’t improve too much.

To estimate social security, I used an estimated annual income of $60,000 and retirement at age 62. The benefits for someone being born in 1983 (like me) and retiring in 2045 come out to approximately $1,353 a month in today’s money. (Side note: I am not counting on SS as we know it today remaining viable too much longer into the future.)

Doing the math, this comes out to $16,236 per year. Take on the 4% from the 401(k) ($4,800) and the other financial assets category ($720) and you can get an additional $5,520 a year. So now we’re talking about $21,756 a year. Not too terrible an amount, but much of this relies on being invested in dividend stocks so that the underlying assets don’t need to be touched. Temporary stock market downturns could devastate a retirement.

Could you live on $1,800 a month in retirement? I’d be hard-pressed to. You could supplement this amount by working. But, once retired do you really want to do that? Wouldn’t you want to enjoy the early retirement years especially when one is in good health? Do you really think social security will be able to supplement nearly 75% of your retirement income? I’d much rather plan on earning nothing from social security and being reliant on my own savings for retirement.

Also, this data is only valid for the subset of people who actually had retirement accounts at work.

I’ve included a graphic entitled, “Retirement Still on Hold for Millions of Seniors,” coming from an article on Bloomberg: At 77 He Prepares Burgers Earning in Week His Former Hourly Wage. This graphic shows that in 2010 only roughly 31% of workers had a 401(k) or IRA.


According to this research, 59% of U.S. senior households had no assets in retirement accounts in 2010. This number is staggering!

We must invest early, often, and take advantage of any employer match. Retirement should be a time to relax, enjoy the “golden years,” and do all the travels and adventures that you might have been unable to do earlier.

It appears to me that the United States has a problem of financial illiteracy that extends up to the highest levels of the government. While I am not usually one to have the government enforce too many things on us, forcing children to take financial literacy classes is something that will greatly improve our longterm financial outlook both as a country and as individuals. Financial literacy classes should be taught in schools as part of the core curriculum along with the other usual areas.

President Obama discussed in his State of the Union address a new type of retirement device called the myRA account, which invests the contributions in government savings bonds. While better than nothing, they have historically had horrible returns compared with the general market. At least the myRA allows you to convert the account into a private Roth IRA.

This may be the only way to stem the senseless and continuous increase in our country’s debt.

Financial literacy classes might be a good longterm solution, but what about the field of the current workers. How can we help them to actually save for retirement? It’s not as if there are no vehicles available to help: 401(k), 403(b), IRA, Roth IRA, 529 plans, just to name a few. Many of these are tax-advantaged as well to give even more incentive to invest into them. So why aren’t they working?

Again, I’m not one for mandates, but would mandating a retirement account be a solution? What about allowing individuals to invest their social security into index funds or stocks? What then would happen to people who choose poor investments?

At some point it all comes down to individual responsibility. The United States government cannot act as the safety net for everyone.


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