Not Saving for Retirement?

In a December 2017 poll, many Americans felt they were just a paycheck away from insolvency.  About 43% fear an unexpected event would deplete their meagre savings, and another 34% find it difficult to make ends meet.  Still, 67% of Americans feel that their finances will get much or somewhat better in 2018, and only 8% feel their finances will get worse or much worse.

Seventy-nine percent of Millennials were optimistic about finances but just 55% of those over age 50 expected their finances to improve.

Despite those anxieties, many respondents were planning major financial events in 2018 — e.g., to buy a new car (27%), relocate (23%), switch jobs (20%), or become a homeowner (13%).  Some are planning more than one serious change.

New large-scale purchases can burden families with heavy debt that carries on for many years.  On the other hand, planned job changes can improve a family’s cash flow.  Significant changes such as debts or new employment can evoke serious stress, especially if there is no rainy-day fund to backstop the unexpected.

The antidote to financial anxieties is to stockpile more savings or equity in investments.  Most of us expect savings to grow as a result of our regular deposits and interest rates.

Our savings are meant to build a safety margin for weathering unexpected expenses, or to be a way to pay off debts, or be the nest egg needed for retirement.  Although the need for significant savings is obvious, many have found the habit difficult to sustain and the results have been puny in the wake of the great recession.

In another survey, 42% expect to retire “broke” or with less than $10,000 in savings.  Half of respondents aged 55+ have saved less than $100,000.  The top reasons given by 55+ respondents for failure to save were “don’t earn enough to save” (40%) and “struggling to pay other bills (24%).

Over the past 11 years, events have worked at cross purposes against those diligently trying to save.

Interest rates were abysmal.  The top deposit interest rates have grown to a mere 1.5%, up from near zero in 2011 and if you are willing to commit for 10 years, a 10-year Treasury will earn a miserly 2.9%.  Long gone are the juicy 5% to 6% rates on safe corporate bonds in 2007.  Today’s highest CD rates pay about 2.3% to 2.5%.  With interest rates that low, meeting your savings goal calls for brute force determination.

Wages have barely increased.  For example, the average hourly earnings of production and nonsupervisory employees over the 10-year period from January 2008 through December 2017 grew just 2.3% yearly.  Wage growth was tepid, and well-paying jobs were in short supply. For example, through the period 2009 through 2011, unemployment was usually above 9%, leaving many without a living wage, let alone a surplus to save.

One way to grow savings was to ride the stock market, but that was scary.  The Dow 30 dropped precipitously to 6,443 in March 2009, but it almost quadrupled to 25,335 by the beginning of January 2018, an average annual growth rate of 17%.  In hindsight, everyone wished they’d put up with the volatility after 2009, but those who saw their savings depleted in 2009 were reluctant to sign up for an erratic rollercoaster potentially leading to another recession.  Few wanted to stay aboard for more abuse.  For those who did stay aboard, there were plenty of market swoons that persuaded riders to seek the safety of the sidelines.

Those with scant savings may be relying on the “Social Security” safety net to rescue them.  But over the next decade or so, Social Security will deplete its “trust fund” and will need a payroll tax increase of 2.8% points, if we expected it to continue benefits at the level.

Even if Social Security is bolstered to preserve status quo benefits, living on the social security stipend is brutal and next to impossible.  To inject some degree of independence and choice into retirement requires wisely invested savings to supplement social security.  This is not news, but it is often ignored.

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