Last July, Senator Tom Harkin, Chairman of the U.S. Senate Committee on Health, Education, Labor & Pensions, issued a report called “The Retirement Crisis and a Plan to Solve It.” In it, he outlined the findings of a series of hearings held by the committee on the retirement crisis that has crept over America like rust over the past few years.
Highlighting just a few troubling facts, Harkin points out that, in aggregate, Americans currently hold a $6.6 trillion retirement deficit. One of only five people in the private sector workforce have a define benefit pension plan, and half of Americans have less than $10,000 in savings. Anecdotal evidence curated through surveys finds that 92 percent of people believe there is a retirement crisis in America.
What’s more, just 4 percent of employers are “very confident” that their employees will retire with sufficient assets. This is down from 30 percent in 2011. Only 14 percent of people believe they will have enough money to live comfortably in retirement. Harkin articulates the idea of the three-legged stool of retirement security — defined pension plans, personal savings, and Social Security — and reveals how each has been eroded and undermined over time.
With this in mind, it has become clear that individuals will need to take a more proactive approach to retirement savings. Social Security will not be enough — if it is even still around in the not-too-distant future — and employee benefits plans are, unfortunately, a job perk that most Americans are forced to live without. This leaves personal savings as the one leg of the stool that individuals can reinforce through fiscal responsibility and good decision making.
Advice on how to better prepare fore retirement is abundant, and sometimes vapid, but it is usually a good idea to review the common knowledge and make sure that your personal strategy does not violate some obvious rule of basic retirement planning.
So, briefly, here are some things to look out for:
1) Shop Around: The go-shop process is a hallowed part of any serious purchase agreement. The go-shop period helps ensure that a company’s board of directors stays true to its fiduciary duty, ensuring that shareholders get the best possible deal in the transaction.
The metaphor isn’t perfect, but think of your retirement savings account as a business. You, through the magic of compartmentalization, are both the chairman of the board and the shareholder. You have a duty to look out for your own best interest, and ensure that you are not paying any more than you absolutely have to in banking or other fees associated with your retirement nest egg.
2) Small Numbers Add Up: Just as small recurring banking and management fees can add up to some serious coin over a period of time, so can small recurring expenses such as a beer, gas, movie tickets, and especially larger expenses associated with hobbies, gifts, and dates. The last thing anyone wants to do in retirement is choose between essentials, and in order to avoid this it is prudent to first choose between non-essentials.
No one’s saying don’t have fun, but just make sure that Present You takes care of Future You.
3) Financial Literacy: Finance, like any other field, has a jargon all its own, along with a robust set of key concepts and best practices. There are a thousand ways to approach this learning curve, and most of them are free. The Internet is an autodidact’s dream come true, but for those who prefer more traditional instruction there are a number of very high quality free online courses now available, as well as words of wisdom from venerable investors like Warren Buffett to consider.
4) Feed Your 401K: If your employer offers a 401K retirement plan, feed it. In many cases, employers will match up to 50 cents on the dollar for up to 6 percent of your salary that you contribute to the plan. If the implication here isn’t obvious, this is about as free as money gets, and its a surefire way to ensure that that Present You is looking after Future You.
If you can afford it, try to contribute as much as you can in order to reap the highest possible rewards. Remember, there’s a psychologically significant effect that comes into play here, as well. If you finally land that high-paying job that offers a sweet 401K and decide to celebrate by spending your first few paychecks lavishly, you’ve taken the first few steps down a slippery slope of “I’ve had it once, and now I want more.”
You want to make sure to condition yourself to a reasonable cash flow, and make sure that your frame of reference for what is a ‘comfortable’ amount of spending money actually makes sense within your budget.
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