This is my second post in a six-part series about what to do if you find yourself in mid-life or later and perhaps ill-prepared in terms of saving for retirement. If you haven’t done so, you may want to read the first article in this series, Behind in Saving for Retirement? (Part 1).
I introduced a “make believe couple”, Mike and Debbie, in the first article. They are a good example of a hard-working, well-intentioned couple who has gotten behind in saving for retirement. Mike and Debbie have approximately $100K saved, which sounds like a lot of money, and it is. However, it is only about 30% more than Mike’s current annual income. So it actually isn’t very much relative to what they may need in retirement in addition to Social Security and perhaps some part time work – and they are not atypical.
Unfortunately, we aren’t doing very well at saving for retirement.
Although saving for retirement is important, recent statistics suggest that overall we aren’t doing very well at it. A recent bankrate.com study found that 36% of adults lack retirement savings of any kind, and 14% of them are age 65 or older. Further, about 26% of those age 50 to 64 haven’t started saving for retirement at all and the figure was 33% of people who are 30- to 49-years-old.
Similar studies say that the “average” retirement savings of 55 year olds is approximately $50k. So, Mike and Debbie are actually doing above-average!
There are many other surveys out there that say basically the same thing. There are many reasons for this situation, including the recession, unemployment, and under-employment. Medical issues and costs can also play a significant part.
Take Mike and Debbie for example. Mike was laid off during the recession and it took him 4 months to find a new job. He received a small severance, but had to dip into his retirement savings in order to help pay the bills. Debbie had an illness that resulted in some outstanding medical bills. During the recession, Mike put most of his 401K and IRA investments in “safe” money market and short-term bond funds, and only recently started putting some of his money back into stock market mutual funds. He remains very wary of the market, especially as it has hit one record high after another, albeit while very volatile. He has seen some increase in the value of his investments, but not to the level they were prior to 2008.
A bright spot for Mike and Debbie is the value of their house. It had decreased in value to $162K during the recession, but has risen to $185K – very close to the $189K they originally paid for it. However, it’s still below its value of $220K in 2007 at the “peak” of the housing market. I suspect this is true for many of us.
There’s certainly no ignoring the huge impact that the recession of the last 8 years or so has had on the average household. Mike and Debbie are good examples. Most younger individuals and families should be able to recover since time is on their side but this heavily depends on investing temperaments and habits. If you stayed in the stock market, you would have already gained everything back and then some. If like Mike and Debbie you went to all cash and basically stayed there, you haven’t.
But those who had just retired or were already in retirement when the recession started may never get back to where they were. That depends on how their savings were invested when the recession hit and what they have been doing since then.
There are other causes for the low savings rate. Over spending and too much debt can play a part as well. If you are a Dave Ramsey fan, you know that he puts a fair amount of emphasis on living debt free and saving for our later years. He also emphasizes generosity and perhaps leaving a legacy to our families.
Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. – Dave Ramsey.
He is saying that by being modest in your spending and avoiding most kinds of debt, you will be better able to save for retirement and to give back to the Lord and to your family and community as well. Its a pretty simple idea: if you spend less you will be able to save more, and to give more as well.
There are two more reasons that may be the most significant contributors to this problem: people tend to procrastinate in this area, and they tend to underestimate the amount of savings they will need in retirement.
Well, not surprisingly, the Bible has something to say about procrastination:
Do not say to your neighbor, “Go, and come again, tomorrow I will give it”—when you have it with you. Proverbs 3:28 (ESV)
He who gathers in summer is a prudent son, but he who sleeps in harvest is a son who brings shame. Proverbs 10:5 (ESV)
In my experience, most people who postpone saving don’t do so because they think saving is unimportant. Rather, they usually have fairly certain expectations that they will have more disposable income down the road and be in a better position to save. Well, as they say, there’s no time like the present, as further down the road things may or may not turn out as planned. And even if they do, money saved for retirement later rather than sooner has less time to grow, meaning that you end up having to contribute much more in order to have the same amount as if you’ve started today.
I will tackle the challenge of estimating how much you need to save for retirement in Part 4 of this series, but suffice it to say that it is one of the more difficult things to do. Plus, most people just don’t think about financial needs from a long-term perspective, so they don’t take the time to estimate how much money they will need for retirement; or if they do, they tend to underestimate how much they will need.
This tendency to underestimate how much you will need in retirement is usually due to a lack of understanding of all the variables involved. Some people feel very confident retiring with a certain amount of savings because it seems like a lot of money to them. (As I stated previously, the $100K that Mike and Debbie have saved seems like a lot, but put into the context of 20 or 30 years in retirement, it really isn’t.) They don’t consider the possibility that they will live longer than the average, or the impact of inflation. They may also tend to underestimate their retirement expenses, or assume Social Security stability and consistently high investment returns based on past history.
If this is you, don’t fear.
If you are behind in saving for your retirement years, this can be a difficult, sometimes emotional issue as it seems that everywhere you turn someone is sounding the alarm about a general lack of retirement preparedness among the “baby boomers”. Of course they also want to give you retirement planning and saving/investing advice. They say things like, “you should have saved a certain amount for retirement by the time you reach a certain age or you will be in real trouble”. Or, they want to give you investment advice and/or manage all your retirement savings for you (for a commission or fee, of course.)
There’s certainly nothing wrong with raising important issues, giving sound advice, or managing someone’s assets for a fee. That’s what the financial services industry does; that’s their business.
That said, there is reason for concern that some of this amounts to “scare tactics” – motivating people to pay for advice and/or buy investments and other financial services out of fear. However, I’m fairly confident that most of it comes from genuine concern and a desire to help people. If you have been tempted to become fearful, I would strongly caution you against making any financial decisions out of fear, or in response to any strong emotion for that matter. Remember,
…for God gave us a spirit not of fear but of power and love and self-control. 2 Timothy 1:7 (ESV)
Anxiety and fear are the enemies of wise retirement stewardship. They cause us to make decisions and take actions due to emotion, not sound-mind thinking and reasoning. They can also cause us to look for quick, easy answers and possibly take too much risk. We may put too much confidence in our friendly financial salesperson who offers us a “too good to be true” opportunity. We act on a “hot tip” from our brother-in-law. Or, we are just paralyzed and take no action at all. Any of these things can sabotage the steps you take to save something for your retirement.
So should you believe everything you read or hear? Certainly not. But can you just dismiss it out of hand and go on your merry way? Well, you probably shouldn’t. You may not need millions, but in some cases the alarms that are being sounded are coming from bonafide experts in the field who understand the financial challenges many of us will face as we get into retirement. It may be wise to listen to some of them, but only in the context of a wise, discerning perspective on retirement that only the Bible can provide.
Read the next post in the series: Behind in Retirement Stewardship? (Part 3).