Many Americans have let saving for retirement drop to the bottom of their priority lists. While the exact figures vary, most surveys indicate that around half of all Americans have less than $5,000 in savings.
There are a lot of reasons that people are unable or unwilling to sock away retirement fund, and many of them completely understandable. Unfortunately, the harsh reality is that you won’t be able to retire with confidence unless you start planning today.
They’re More Focused on Short-Term Savings Goals
For most people, retirement seems far away, and it’s easy to prioritize shorter-term goals over retirement – a down payment for a house or car, travel, or replacing your beat-up washing machine.
“People spend more time planning for their next vacation than for retirement – a huge mistake,” said Scott Bishop, Executive Director of Wealth Solutions for Avidian in Houston, Texas. Putting your vacation — and other savings goals — ahead of your retirement plan could make your golden years difficult.
They Don’t Know How Much They Need for Retirement
Ignoring the fact that a lower-income lifestyle is in your future won’t help you reach a savings goal any faster.
When you aren’t sure how much you actually need for retirement, use an online retirement calculator to estimate how much you should save every year to reach your goals. If your personal finances are more complicated, or you just don’t know where to begin, you can also consult a professional advisor or financial planner.
They Assume They Can Catch Up Later
You won’t have time to catch up on retirement savings if you wait until the last minute. As a result, you might be forced to delay your retirement and keep working until you can earn enough to finally retire. You’re also missing out on the power of compound interest if you avoid making contributions to your retirement fund early.
They Already Used Their Retirement Savings for an Emergency
Many Americans don’t have a single penny set aside in a retirement account because they used the funds to take care of unexpected or emergency expenses. It’s hard to blame them — if the alternative is taking on debt, then it’s certainly tempting to dip into money that’s sitting right there, and some expenses simply can’t be put off.
But tapping into your retirement fund before you retire can have severe consequences. From medical expenses to house repairs, emergency expenses can put a large dent in your retirement savings account. And it can take months or even years to rebuild those savings.
They Took an Early Withdrawal from Their 401(k)
Withdrawing money from your 401(k) before you’re fully eligible is a decision that can cost you in early withdrawal penalties, further reducing the savings potential for your retirement years. The withdrawn funds will also incur a tax obligation, and if you’re under 59 1/2 years of age, you’ll be subject to a 10% federal penalty and possibly a state penalty, depending on where you live.
However, it’s important to note that in some cases, the IRS will waive the early withdrawal fees, such as for medical bills and funeral expenses. If you should find yourself in a position where you’re forced to consider taking money out of your 401(k), be sure to check if your situation qualifies for a hardship withdrawal.
They Don’t Have an Employer-Paid Retirement Plan
For many workers, their employer doesn’t offer them a retirement plan — so they haven’t saved anything. According to research from The Pew Charitable Trusts, just over half of small and mid-sized businesses offer a retirement plan benefit. One of the top reasons given is the belief that employees prefer a higher salary over retirement benefits, leading them to prioritize pay in order to attract and retain workers.
But if your employer doesn’t offer these benefits (or if you’re self-employed) that doesn’t mean you’re out of luck. There are other options available to you like a Traditional or Roth IRA, Solo 401(k), or Health Savings Account.
They Don’t Think They Need Retirement Savings
Whether it’s because they expect to earn enough through passive income when they leave the workforce or they’re expecting a trust fund payout, some Americans don’t feel the need to set aside a portion of their paycheck for the future. Unfortunately, this could put them on the fast track toward financial disaster during retirement.
Once you reach retirement, it’s unlikely your expenses will stay the same. Don’t fool yourself into thinking you can get by without retirement savings. Take steps now to reduce your current expenses and stash away extra money into an account. As Bishop said, you “need to have a plan, have a budget and stick to the budget.”
They Depend on Social Security Checks
Adults 65 and older spend an average of $52,141 a year, according to the Bureau of Labor Statistics. Will your Social Security checks be enough to provide that level of income? It’s unlikely. The estimated Social Security benefit for workers retiring at full retirement age in 2023 is $1,696. When you rely only on Social Security in retirement, you quickly learn that your check doesn’t go far.
Additionally, it’s risky to rely solely on Social Security because the program is susceptible to changes. Retirees need to be prepared for the possibility that their projected benefit will shrink because of major political, social or economic events.
They Rely on Multiple Income Streams
Whether it’s from rental income or a passive income stream they built during their working years, some Americans are confident they will be comfortable on their passive income during their retirement years. But those funds might not be enough. According to research conducted by T. Rowe Price, you should be targeting a 75% replacement rate for your current income.
They’re Still Recovering From 2008
It might be some 15 years later, but many people are still recovering from the 2008 financial crisis, and it’s still affecting their ability to save for retirement. The crisis in the American housing market left millions of homes in foreclosure. Those who felt the effects of the 2008 crisis the most could be less likely and able to save money for retirement with their focus more on taking care of current bills, especially mortgages and other living expenses.
But creating a retirement plan could actually make you feel secure in the event of another economic crisis during your lifetime. David Freitag, a financial planning consultant with MassMutual, points to a MassMutual study that found a relationship between happiness and planning.
“Retirees who expressed the highest levels of satisfaction were also those who took concrete steps to put both their emotional and financial lives in order at least five years before retirement,” he said.
They Don’t Make Enough To Save
Not earning enough money is another reason some Americans are ignoring their retirement fund. Reconsider if you think you need to meet a certain salary level to start building up your retirement fund. All it takes is a small contribution each month and a little bit of interest to grow your nest egg.
Consider the following example: Let’s say you’re 40 years old, and you don’t have anything saved yet for retirement. If you save just $200 a month, earn an annual interest rate of 7% and let your savings compound annually, you’ll save more than $150,000 by the time you retire at age 65. That extra $150,000 could be the difference between living a dream retirement and retiring completely broke.
They Aren’t Matching Employer Contributions
When employers offer matching retirement contributions, it’s foolish not to take advantage of what is essentially free money. Research has shown that nearly 30% of people are not taking full advantage of a 401(k) match from their employer.
Neglecting to take advantage of this benefit means you could be leaving money on the table as every working year goes by. All you have to do is be diligent about making your maximum annual contributions, so your employer follows suit.
They Have Student Loan Debt
Many workers start their professional careers with a substantial student loan burden. It can be a challenge to save after paying for living expenses and making interest payments – especially on an entry-level salary. However, you shouldn’t let that student debt prevent you from saving at all. Consolidating loans or exploring refinancing options might be all it would take to free up some money for retirement contributions.
They’re Afraid of the Stock Market
Stock market volatility can put your retirement at risk, but the odds of your retirement account disappearing completely by the time you hit retirement are very low. Historically, the stock market has offered the best long-term returns. When you invest consistently and responsibly, you will see your savings grow over time. Missing out on those returns because of your fear of a stock market crash could put your retirement years at risk.
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Sabah Karimi contributed to the reporting for this article.