More Than 1/3 of Americans Didn’t Start Planning for Retirement Until 46 — Here’s How You Can Catch Up
April is Financial Literacy Month, which makes it a great time to assess the state of American finances. What a recent GOBankingRates survey found was that Americans seem to feel financially unprepared. These self-reported opinions are backed up by the fact that Americans, in general, are behind in their retirement savings — some dangerously more than others. If you find yourself in this situation, there are steps you can take to amp up your savings. Let’s first take a look at where Americans stand when it comes to financial literacy and then we’ll dive deeper into the current retirement savings problem and how you can get caught up if you’re behind.
Respondents Indicate They Are Financially Literate Yet Lacking in Crucial Knowledge
The survey reveals an interesting dichotomy between how financially literate Americans think they are and what they actually know. Overall, 80.93% of Americans consider themselves financially literate, yet a large number admit to not understanding certain aspects of basic finance. For example, over half of Americans in the survey indicate they don’t fully understand the child tax credit, while nearly two-thirds find at least some part of the process of buying a car confusing. That jumps up to nearly three-quarters of respondents who find some or all of the homebuying process confusing.
Americans Avoid Investing Due to Lack of Knowledge
Financial literacy doesn’t simply apply to big purchases like cars and houses. It also relates to successful investing, which is a big part of retirement planning. And in this area, Americans in the survey offered a frank admission: Over 44% of respondents indicated that they simply avoid investing because they don’t understand it. This points to a woeful lack of education in America, something that is needed to generate wealth and meet lifelong savings goals, like retirement.
A Large Number of Americans Haven’t Saved at All for Retirement
Just like many Americans are putting off investing, when it comes to saving for retirement, a large number of survey respondents indicated they started much too late. In fact, more than one-third of respondents indicated that they either waited until age 46 to begin saving or have not even started at all. That number jumps to a whopping 40% of female respondents. Starting that late in life brings major hurdles to saving for retirement, as outlined below.
Hazards of Waiting To Save
The hazards of waiting until later in life to save are clear. Not only does it take more time, effort and money to reach retirement goals with every year that passes, it’s also more likely that you may never begin at all. Most Americans who delay or fail to save for retirement also come up short in the area of building an emergency fund. Failing to save for either of these needs can have serious consequences in other areas of life, including the following:
- May have to divert cash flow from other needs, such as housing, education, food and utilities
- May have to go into debt to meet your needs
- May have to work longer than desired to have needed funds
- May create undue stress and/or mental health problems
The bottom line is that failing to save can trigger a snowball effect that can put you in a financial hole that only keeps growing. Gaining financial literacy and applying those principles to saving and investing are the cornerstones of a sound financial life.
Things You Can Do To Catch Up
The first step in any crisis situation is to identify the problem openly and honestly. If you find yourself at age 45 with no retirement savings at all, for example, it’s best to put your cards on the table and tackle that problem head-on. Burying your head in the sand and hoping the problem will somehow resolve itself is not a recipe for financial success. Acknowledging where you stand, on the other hand, allows you to be proactive and chart out a path for success. Here are just a few of the steps you can take if you find yourself behind in your retirement savings:
Make Catch-Up Contributions
The U.S. government realizes that there is a retirement savings shortfall in the country, and it makes fairly generous provisions to help Americans beef up their retirement accounts in later life. Specifically, if you contribute to an IRA, the IRS permits a $1,000 “catch-up” contribution for those ages 50 and older. This is in addition to the annual $6,000 maximum that all workers can contribute. If you have access to a 401(k) plan, terms are even more generous. On top of the $20,500 that eligible workers can contribute to a 401(k) plan, those ages 50 and older can kick in another $6,500, bringing the total available contribution level to $27,000. Assuming you earn enough to make these types of contributions, in the 10 years from age 50 to 60 this means you can put $70,000 into an IRA, or a whopping $270,000 into a 401(k). Combined with the investment returns on those contributions, you can rapidly build up a decent nest egg.
Find Extra Income/Side Work
Unfortunately, most Americans aren’t able to put aside $27,000 per year into a 401(k) plan — or even $7,000 per year into an IRA. In that case, increasing your earnings is the best way to build up your savings. While this may be easier said than done, there are certain strategies you can employ to beef up your earnings, including asking for a raise, looking for a higher-paying job, picking up a side gig or generating passive income, such as from rental properties.
Revise Your Budget
Hand-in-hand with boosting your income comes trimming your expenses. When employed together, these strategies can dramatically improve your cash flow, and therefore the money you have available to set aside for savings and investments. Review your budget to see where your money is going and do what you can to stem any outflows. One strategy that more than half of respondents are employing during the current spike in gas prices is to drive less. Other common budget items that you can target to reduce your spending include monthly subscriptions, dining and entertainment expenses, and housing costs. In some cases, simply moving to a different part of town — or perhaps a different state — can be a way to cut your overall expenses without having to deprive yourself.
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Methodology: GOBankingRates surveyed 1,012 Americans aged 18 and older from across the country on between March 8 and March 9, 2022, asking sixteen different questions: (1) Do you consider yourself financially literate?; (2) Where did you learn most of your financial literacy?; (3) Which financial topic do you think you should have learned more about in high school? (Select all that apply); (4) Which financial topic do you still feel you need more education on in 2022? (Select all that apply); (5) When you were growing up, did your parents talk to you about how to manage your money?; (6) Do you think high schools are lacking in financial education?; (7) How has a lack of financial education cost you the most?; (8) At what age did you become comfortable with basic money skills (i.e., writing a check, balancing your accounts, budgeting)?; (9) At what age did you start saving and planning for retirement?; (10) How do you feel about how you used your 2021 American Rescue Plan stimulus check?; (11) Which financial topic did you feel the need to learn more about due to the COVID-19 pandemic? (Select all that apply); (12) What do you not understand about the Child Tax Credit? (Select all that apply); (13) Which part of the homebuying process is most confusing to you?; (14) Which part of the car buying process is most confusing to you?; (15) Are you prepared for the student loan debt moratorium to end in May?; and (16) How are you changing your driving habits with the rising gas prices? GOBankingRates used PureSpectrum’s survey platform to conduct the poll.