Even though, according to Gallup, Americans worry about saving for retirement than any other single financial issue, their words and deeds are not matching up. According to research by Merrill Lynch, nearly one third of adults are unwilling to forego pleasures like eating out, entertainment, and vacations in order to save more for retirement. Yet those same people as parents will willingly make those sacrifices to support their children financially.
In the Gallup study, the two big financial worries for all age groups are having enough money to survive a medical emergency and having enough money for retirement. So why is there such a disconnect between what people worry about and what they actually do in their financial lives? Maybe younger Americans, facing the prospect of working through their retirement years anyway, are opting to take their retirement in installments now — rather than saving up for later in life.
Financial advisors aren’t helping by telling people things like they need $2.5 million to retire. The majority of Americans, depending slightly upon their age, barely have $25,000, let alone $2.5 million. Only 3% had a million or more stashed away by age 54. Facing those grim prospects, is it really a surprise that many would react with frustration? Since there’s no way they can save that much money anyway, they might as well go out to eat right now.
The $2.5 million figure is based on the assumption that you’ll want to make $100,000 a year in retirement and travel! Making $100,000 a year would put you in the top 5% of all income levels, with the average person bringing in closer to $45,000 a year. For the majority of Americans, the assumptions for the $2.5 million figure are patently absurd.
Money Not Working
A sad number of people are falling short on retirement savings because their money is sitting around gathering dust rather than out working and earning a return. Despite the blistering performance of the stock market over the last five years, most Americans are still looking at Wall Street with suspicion that’s likely a hangover from market crash of 2008. While I can relate to not trusting the wizards of programmed trading, it’s going to be hard to build up for retirement with Americans keeping over a third (36%) of their retirement money in cash or cash equivalents . Interestingly, the flight to cash cuts across age, demographic lines and even international borders.
Nearly two-thirds of investors don’t even know the rate of return on their money, and even fewer understand that there are safer ways to invest money at a higher rate of return than a money market account. With investment vehicles such as REITs, preferred share funds, and market sector funds, investors can spread the risk around a diversified portfolio. There are even funds and ETFs that specialize in low volatility investments like utilities and consumer staples, which can smooth out the bumps and still perform very well on a long time horizon.
Knowledge is your friend when it comes to investing, and spending a few dollars on a book like A Beginner's Guide to Investing: How to Grow Your Money the Smart and Easy Way by Alex Frey or The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham can give you the knowledge and confidence you need to make your savings work harder, and make your retirement seem less daunting.
Who knows, you might even bank enough to be able to go out to dinner once in a while without feeling guilty.