There’s a Retirement Crisis in the USA
This is what you need to know, and 3 drastic steps to help save yourself.
The Crisis:
Baby Boomers and Gen X-ers are either in retirement, or quickly approaching it. But many have so little saved that they may never actually get to retire. To make matters more complicated, many Boomers and X-ers are going to live longer than they ever thought possible. Longevity compounded with no savings amounts to a miserable retirement (Millenials, we need to learn from their mistakes). It all boils down to a lack of preparation.
“By failing to prepare, you are preparing to fail.” Benjamin Franklin
A Brief Look at a Retirement Structure:
There are three facets, or pillars, of financial security that should inform your retirement choices. The first pillar is Personal Savings: 401(k)s, IRAs, Stocks, Bonds, Mutual Funds, CDs, Cash. The second pillar is your Social Security benefit. The third pillar is something most Millennials will never have heard of: Pensions.
In theory, your savings and pension should be your largest asset classes in retirement, while Social Security serves as a supplement to your income. Unfortunately, more and more people have that equation reversed: Social Security, Pension, and then Personal Savings. The danger in this structure is that it assumes Social Security and Pensions will be around through your golden years, and provide enough to support you.
A Look at the Ugly Social Security Numbers:
Based on reports by numerous think tanks and government organizations, Social Security benefits will need a drastic reduction in the next 11 years or face solvency issues. How drastic? About 30% drastic. Currently, the average Social Security payment hovers around $1400 per month or $16,800 per year. Take away 30% and you’re left with a yearly income of $11,760. That’s less than $1,000 bucks per month! That’s poverty income. If this is your only income, that’s a failure to plan.
The Dismal Personal Savings Figures:
In 2018, the average retirement balance hovered around $180,000 for the 55–64 age group (those just about to retire). And that’s not too terrible! But it misses the ugly truth hidden underneath: there are some very wealthy individuals whose retirement balances skew those numbers when you average them. The true test is the median balance. The median balance is exactly the middle of the road: 50% have more, and 50% have less. That number: about $70,000.
Let that number sink in: $70,000. If we assume you only live 20 more years, and manage to earn 5% interest compounded annually on that amount, you can spend $5,349.51 per year before you run out of money.
The Unicorn Called Pension:
If you have a pension, I want to take a moment and congratulate you! You have something few people have. You have a unicorn! But, not all pensions are created equal:
- Median Yearly Payout of Private Pensions: $9,000
- Median Yearly Payout of State or Local Government Pensions: $17,600
- Median Yearly Payout of Federal Pensions: $22,200
A Year in the Life of a Poorly Planned Retiree Who Captured a Unicorn:
If we assume you have the median of all three financial categories (Savings, Pension, and Social Security) this is what your yearly financial life will look like:
- Social Security: $11,760
- Personal Savings: $5,349.51
- Pension: $9,000
Grand total (including unicorn): $26,109.51 per year.
Average household expenditure in retirement: $45,800 per year.
Shortfall: $19,690.49
That Sinking Feeling and What to do:
Scared yet? I hope so. That’s why this is a crisis. It has arisen from a series of compounding felonies: ignorance, fear, laziness, and shortsightedness. But, there may still be time to save yourself. Here are three steps drastic steps and the resultant savings you can achieve:
- Cut the crap out of your life. We spend almost $6,000 per year on these five unnecessary indulgences: gourmet coffee, unworn clothing, alcohol, special events, and eating out. How do you cut down on 2/3 of those expenses: 1) Bring coffee from home in a thermos — it’s the same crack in a cup. 2) Stop buying unnecessary clothing and wear what you have (Marie Kondo has a great book on this; then sell the clothing and invest the money). 3) No one needs booze — just commit to a healthier life. 4) If you’re this broke, you haven’t earned a special events ticket. Give ’em up. Stay home and watch the special on Netflix. 5) Back to living a healthier life: learn to cook at home. Have family time with your spouse, kids, or grand kids. Reconnect. If you cut out 2/3 of those expenses, saved them in a Roth IRA, and invested them in an S&P index fund for 10 years you’d have $69,329.40. If you can save that money for 30 years, you’d have $695,651.95! Now you can retire comfortably.
- Multi-car kind of family? The average household spends $9,000 per year on cars, insurance, gas, and commuting. Sell the car and carpool, take the train, the bus, a bike (healthy), or walk. If you can reduce your expenses in this category by 45% and invest them in a Roth IRA for 10 years you’d have $70,196.02. After 30 years: $704,347.60!
- Fitness: If you’re broke but going to a fitness center, buying special pH water, and super secret supplements and protein powder: Stop. Gyms run about $60 per month. That’s $720 per year. You can get a used copy of P90x for about $20 and look as good or better than going to a Sports Club. As to the bottled water, it’s about $2 per bottle. Assuming only one bottle per day, you’re spending $730 per year on water. Water. That you can get from a faucet! Then there are the supplements (not the ones from your doctors — keep taking those). I’m talking about gym supplements. They’re not regulated. They could be a ‘proprietary blend’ of sugar and flour. But the average gym bunny spends about $50 per month. $600 per year. If you cut out all the expenses and rolled it into a Roth IRA, after 10 years you’ll have $35,531.32. After 30 years: $356,521.63.
Any one suggestion from above will bolster you retirement. If you manage all three — my hat off to you, my friend! Happy saving from the Nifty Tie Guy.
Keep the FIRE burning!
