With the average personal savings rate for Americans at just 4.8% of disposable personal income, it’s clear Americans are not saving enough for retirement.1 It would take roughly 21 years at a 4.8% savings rate to cover just one year’s worth of living expenses. Given most people plan to live for more than one year after retiring, something most be done to increase savings and/or decrease spending.
People in the bottom 90 percent of income earners are also lagging far behind the top 10 percent in terms of saving. Between 2000-2009, the bottom 90 percent had a negative savings rate of roughly four percent. Although their savings rate rose to zero between 2010-2012, the top one percent were saving nearly 40 percent in comparison.2
Why We Don’t Save More For Retirement
To first understand why most people don’t save enough, let’s go through some common causes of bad spending habits.
* Lack of self-esteem. When we lack self-esteem, we sometimes buy things to make us feel better about ourselves. We are bombarded on a daily basis by how society thinks we should look and dress. The TV and movie industry purposefully choose attractive, wealthy, and intelligent people to lure in viewers, but those personas barely exist in our daily lives.
* Keeping up with others. Many people are easily influenced by their environments. For example, if you come home one day and see your neighbor with a new car, you may suddenly want to buy a new car yourself. It’s easy to overspend to keep up appearances. On the other hand, beating the Joneses takes discipline. And now with social media, instead of just observing how your neighbors live, you get to keep track of all your friend’s fabulous lives too. You know, the updates from the Maldives, or skydiving in Spain. It’s as if everybody is on vacation 24/7. As a result, you may feel the need to do the same to avoid feeling inadequate. The best thing to do is to quit the constant checking and reflect on what you already have.
* Entitlement. When do we want it? Yesterday! In the world of instant gratification, it’s very difficult to save for a long period of time. Instead, credit cards make it all too easy to go into consumer debt in order to get what we want now even if it’s out of budget. Thinking you deserve something when you simply can’t afford it can lead to financial trouble. It’s important to differentiate wants versus needs.
* Lack of knowledge. People don’t realize how expensive consumer debt can be. With mortgage interest rates remaining below 4 percent for 15 straight weeks and still well below last year’s rates, it’s a curiosity to see credit card interest rates continue to average in the high teens.3 If you pay a 15 percent credit card rate and pay the minimum each month, your credit card debt will double in five years. If you pay a 20 percent interest rate, then expect a doubling of debt in only three and a half years. The miracle of compounding works equally as well in reverse.
* Easy credit. Practically anybody with a pulse can get a credit card with a thousand dollar line of credit nowadays. Heck, credit card companies continue to market their cards to college students who typically don’t even have a steady income yet. Access to easy credit can lead to overspending problems.
* No budget. If you don’t know how much you make after taxes and retirement contributions, then you don’t know how much you can spend. Putting together your first budget takes work, but afterwards, everything can become automatic. Having a budget can help you optimize your daily finances and spend only within your means.
* Household income getting squeezed. Perhaps American workers aren’t entirely at fault for not saving enough. As seen below, the median household income has declined from a high of nearly $58,000 in 1999 to less than $54,000 in 2014. With roughly 7 percent less to spend on average, perhaps the American public is doing a relatively decent job of saving given savings rates have begun to increase.
* Laziness. Many people waste money by overpaying for products and services that they could get elsewhere for less. Shopping around for good deals takes extra time and some people are just too lazy to make an effort to price check or use discounts. It’s good practice to look for cheaper alternatives each year on recurring expenses like insurance and paid subscription services like cable and cell phone plans.
* Buying more to “save” more. Retailers are experts at marketing their products and luring in customers with catchy advertising and promotions. But developing a spending habit of constantly buying more to “save” more is likely to result in stock piles of things you don’t need and a lot less money in your retirement accounts. Think carefully before you make purchases.
Retirement Savings Goal
A general goal everybody should consider adopting is maxing out their IRA or 401(k), while contributing an additional 10-20 percent in an after-tax savings account or investment account like Motif Investing for as long as possible.
This way, you can take advantage of tax-advantaged growth and also have liquidity in case you want to buy a big-ticket item like a house, or need to cover an emergency expense like a health-related accident without paying an early withdrawal penalty.
Here’s an example of how much you could save in your 401(k) by age if you max it out every year:
If you are counting on Social Security to help you in retirement, it’s best to temper expectations. The Federal government has stated that Social Security is underfunded by roughly 25 percent.4 Therefore, if the average Social Security benefit is $15,672 a year per retiree and $25,680 a year per couple in 2015, it’s fair to cut these estimates down by 25 percent.5 Alternatively you could consider a 20 percent increase in your retirement age for accepting benefits.
It’s logical to conclude that most people are bound to have less income in retirement than while they are working. And since most people are unlikely to receive a large inheritance from their parents, overspending could leave a lot of people without a financial safety net in retirement.
As a result, it’s imperative to learn how to control your cash flow now. By investing excess cash flow today, the hope is your funds can compound large enough while you’re still working so that your money can work for you in retirement.
Work on developing better spending habits and start saving more of your extra cash. The earlier you start saving, the more likely you are to have a comfortable retirement.
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1 Bureau of Economic Analysis, “Personal Income And Outlays, September 2015,” U.S. Department of Commerce, October, 30, 2015.
2 Thompson, Derek, “Forcing Americans To Save Money,” The Atlantic, November 4, 2014.
3 The Associated Press, “Average US Rate On 30-Year Mortgage Jumps To 3.87 Percent,” The Associated Press, November 5, 2015.
4 Chief Actuary, “The Future Financial Status Of The Social Security Program,” U.S. Social Security Administration, 2015.
5 Social Security Administration, “2015 Social Security Changes,” Social Security Administration, 2015.