We live in an instant gratification society. The house, the car, and annual vacation take precedence over contributions to retirement and savings accounts. It therefore comes as no surprise to me that Americans spend more time planning for vacation than they do on planning for retirement.
Given the choice of spending or saving, Americans in large part choose “spend now, save later.” In other words, Americans choose to drink $10 margaritas now (spend) and swallow the more expensive poison (save) later. Spending now and saving later sounds good in theory until you reach your mid-60s and realize you’re going to have to work as a Wal-Mart Stores greeter into your 80s while eating cat food in your tent.
To make matters worse, you don’t have to be a genius to see that irresponsible government spending and globalization have compromised the health of our country’s entitlements (Social Security and Medicare). Benefits are likely to be reduced over time and age eligibility requirements are likely to increase. If you fold in the dynamic of exploding healthcare costs and broad-based inflationary pressures, one can quickly realize savings habits need to change.
The traditional model of working for 40 years and then relying on a pension and Social Security payments to cover a blissful multi-decade retirement just doesn’t apply to current reality. On top of the disappearance of plump pensions, life expectancy is rising (around 80 years in the United States), so the realistic risk of outliving your savings has a larger probability of occurring.
Surely I am overly dramatizing the situation by sounding the investing alarm bells out of self-interest, right? Wrong. As a geeky, financial numbers guy, I can objectively rely on numbers, and the statistics aren’t pretty.
Here’s a sampling:
- Empty savings cupboard: A 2013 study by the Employee Benefit Research Institute found that nearly half of workers had less than $10,000 saved, and according to Blackrock Inc. CEO Larry Fink, the average American has saved only $25,000 for retirement.
- Food stamp living: Almost half of middle-class workers will be forced into a poor retirement lifestyle, living on a food budget of about $5 a day.
- 401(k) will not save the day: Compared to other forms of savings, the average 401(k) balance reached $89,300 at the end of 2013 — that’s the good news. The bad news is that only about half of all companies offer their employees 401(k) benefits, and for the approximately 60 million people that participate, about a fourth withdraw these 401(k) funds before retirement out of necessity or for frivolous reasons. Even if you cheerily accept the size of the average balance, sadly, this dollar amount is still massively deficient in meeting retirement needs. It’s believed that your savings should be approximately 15 to 20 times your annual retirement expenses that aren’t covered by outside sources of income, such as Social Security or a pension.
If these figures aren’t scary enough to get you saving more, then just use common sense and understand the future is very uncertain. A 2012 New York Times article sarcastically captured how easy it is to plan for retirement:
“First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Thirty percent of every dollar [if you are 55 now].) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.”
What to do?
The short answer is save. This can be achieved in one of two ways: cut expenses or raise income. I won’t go into the infinite ways of doing this, but adjusting your mindset to live within your means is probably the first necessary step for most.
As it relates to your investments, fees should be your other major area of focus. The godfather of passive investing, Jack Bogle, highlighted the dramatic impact of fees on retirement savings. As you can see from the chart below, the difference between making 7 percent versus 5 percent over an investing career by reducing fees can equate to hundreds of thousands of dollars and prevent your nest egg from collapsing two-thirds in value.
Lastly, if you are going to use an investment adviser, make sure to ask the adviser whether that person is a “fiduciary” who legally is required to place your interests first. Sidoxia Capital Management is certainly not the only fiduciary firm in the industry, but less than 10 percent of advisers operate under this gold standard.
Investing and saving is a lot like dieting: easy to understand the concept but difficult to execute. The numbers speak for themselves. Rather than dealing with a crisis in your 70s and 80s, it’s better to take your poison now by investing and reap the rewards of your hard work during your golden years.
Wade Slome CFA CFP is president and founder of Sidoxia Capital Management and shares his investing insights at Investing Caffeine.