If you are anything like the average American — and the odds suggest that you just might be — you are woefully underprepared for retirement. A June 2013 report from the National Institute on Retirement Security highlights some the relevant data: the average working-age household has a retirement account balance of just $3,000; the collective retirement savings gap among working households aged 25-64 is between $6.8 and $14 trillion (depending on targets and measures); and as many as 48 million working-age households (45 percent of the total) do not own any retirement account assets.
If you are savvy with your personal finances and have managed to squirrel away some dollars in a 401K or an IRA over the years, you are in a better position than many, but the data suggests that you are still underprepared. At 4.8 percent as of October 2013, the personal savings rate in the United States is well below the 10 to 15 percent range that experts recommend to ensure retirement savings targets are met.
This data may be alarming — or you may already be familiar with the cries of crisis, given that they are plastered all over the financial media — but the first step to solving any problem is recognizing that there is one. The data indicates that the situation is dire, and if you want to avoid participating in what many believe will be (or already is) a crisis, you will have to take action. We spoke with Dave Littell, RICP Retirement Income Program Director at The American College, about the things that Americans can do to help prepare them for retirement. Here are a few resolutions to consider taking for the New Year to get started.
1. Educate yourself
In the immortal words of G.I. Joe: knowing is half the battle. Information about the average, underprepared American’s retirement is illustrative, but ultimately useless for those same people. If your retirement account has more dust than dollars in it, what you need are strategies to change your situation and the information necessary to make an informed decision. Gaining this knowledge is perhaps the most valuable thing you can do to ensure that you are prepared for retirement, next to actually committing to and faithfully executing the strategy you choose.
We will get into some specific strategies, but there is one important principle to understand moving forward: there is no one-size-fits-all solution. The best strategy for any given person will vary, depending on factors such as: age, current savings and assets, current income, marital status, debt, and desired retirement lifestyle. The information you get from articles like this is necessarily general and should serve to help guide and contextualize your retirement strategy, and is not a replacement for a custom-tailored strategy. So the first, and perhaps most important, commitment you can make is to your education.
2. Figure out your circumstances
There are a lot of variables to consider when developing a retirement strategy, and you are the person who can best define those variables for yourself. Some are obvious: how long of a timeline are you working with? Younger people will have a different strategy than older — and some are less obvious. What sort of lifestyle do you want to live in retirement and how much savings will be necessary to finance it?
This sort of quantitative, goal-oriented strategy is much more likely to succeed than relying on a nebulous “save as much as you can and hope for the best” strategy. While this may seem obvious, the data suggests that many, if not most, Americans pursue the latter and not the former. Littell from the American College suggests that one of the most useful things people can do is to find an online retirement calculator and spend some time familiarizing themselves with it. This will help you develop an understanding of what your personal needs are, and will help prepare you for the next resolution, should you choose to accept it. Here are some calculators offered by: AARP, Bloomberg, Charles Schwab, and CNNMoney.
3. Seek professional advice
It is by no means impossible to successfully plan your own retirement, but again, the data suggest that many Americans are failing to do so. The analogy is not perfect but it is fair in some ways to compare a retirement professional to a personal trainer: they will take your game to new level. They are the people with the experience and expertise necessary to make the most out of what you have, and can help ensure that you reach your goal.
Seeking professional advice is not an excuse to neglect your personal responsibilities to your retirement, though. The time you spend speaking with an expert will be much more productive if you have already done some thinking, hashed out an outline of what you want your retirement to look like, and are financially literate enough to understand the strategies that are presented.
4. Just start saving
Obvious, right? But once again, the data suggests that many Americans are simply not putting away enough money. Here is a quick, grossly oversimplified but hopefully illustrative example of why a saving plan is so important.
Imagine you are 22 years old, fresh out of college and with a brand spanking new entry-level job in hand. Let’s say you make $30,000 a year, and you have no savings in the bank. You think that it would be nice to retire by 67 — how much of your paycheck should you save? You would need to save about 11 percent of your income to make this happen. Circumstances change, of course, but the appropriate savings rate for most people is between 10 and 15 percent. We mentioned it earlier: this is well above the October 2013 average savings rate of just 4.8 percent.
5. Watch the market, but don’t be afraid of it
The 2008 financial crisis was devastating for most Americans, and one of the hardest hit demographics were those people just gearing up for retirement. Imagine gearing up to cash out an equity portfolio only to see the stock market crash, reducing the value of your holdings by as much as 40 percent in just a few months. Those who were already out of work or who would be leaving their jobs soon — or who were forced out of their jobs by the very same crisis — were faced with nothing but bad choices. Cash out anyways, or wait years for prices to recover and try to scrap by.
It is hard, if not impossible, for any individual to avoid the market, but fear of volatility shouldn’t deter you from investing. The right investment strategy will vary with circumstance, but generally speaking it is still the best option to put your money in stocks. This is an area where advice from a retirement or investment professional would be very valuable.
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