America is growing older by the day. The number of people age 65 and older will almost double over the next 35 years as the median age rises to about 41. In fact, one in five people in the United States is expected to be at least 65 years old by 2050. This demographic tidal wave has major implications for our economy, particularly in regard to Social Security benefits and retirement planning.
Social Security is a financial lifeline that can only rescue so many bodies. Without some type of reform, benefits will need to be cut by 23% in aggregate in 2033, according to a recent report from the Social Security Administration (SSA). In other words, after the depletion of reserves, continuing tax income is expected to be sufficient enough to pay only 77% of scheduled benefits in 2033. Making matters worse, some researchers believe the SSA overestimates how long current benefits will stay afloat, and millions of Americans believe the program will sink into insolvency by the time they retire.
A new analysis from the Pew Research Center finds that among Americans who have not retired, only 20% expect Social Security to have enough money when they retire to provide them with benefits at current levels. Thirty percent say they will receive benefits at reduced levels, and 41% say they will receive no benefits at all. Despite these findings, many Americans are counting on Social Security to make retirement possible.
Let’s take a look at 5 signs indicating you might be counting on Social Security too much for retirement.
Lacking financial literacy
If you plan to never read a personal finance book or educate yourself about money because Social Security will bail you out, you could be in for a surprise. Unfortunately, you’re not alone. Financial literacy in America is dismal. A survey from the American College of Financial Services finds the majority of Americans are clueless about retirement planning. Eight out of 10 retirement-age Americans with at least $100,000 in assets failed a basic quiz on how to make their nest eggs last throughout retirement, and only about 7% of respondents scored a C or better.
Yet more than half consider themselves well-prepared to meet their income needs in retirement, while almost all are at least moderately confident in their ability to achieve a secure retirement. The survey finds a lack of financial knowledge in several areas, including effective actions to build financial security, different types of investment products, and preservation strategies. Even questions about Social Security stumped respondents.
Not taking a 401(k) match
Do you ignore free money from your employer because retirement is so far away? Do you think Social Security will make up the difference between a small nest egg and your retirement dreams? A 401(k) is one of the most popular investing vehicles, but millions of Americans are failing to maximize their accounts. Financial Engines finds 25% of employees are not saving enough to receive their company match. On average, those employees missed out on an extra $1,336 a year, or a little less than an extra $25 a week. Overall, Americans are losing roughly $24 billion every year in matching contributions. Considering the wonderful effect of compounding returns, the longer you wait to receive your company match, the more money you potentially remove from your golden years.
“The 401(k) match is one of the best deals going for employees, providing an immediate 100% return per dollar invested,” said Greg Stein, Financial Engines director of investment technology, in a press release. “Maximizing your available 401(k) match is a key way for millions of American employees to improve their retirement security. While many people might feel like they can’t afford to save more, we hope that these numbers help them realize that they can’t afford not to.”
Treating your 401(k) like petty cash
Unlike Social Security, accessing your 401(k) money is relatively easy, with early withdrawals and loans. While siphoning money from your 401(k) is generally not recommended, it can be tempting if faced with a serious short-term liquidity crunch. However, treating your 401(k) like petty cash and spending it on discretionary purchases is a dangerous financial plan.
According to a report from HelloWallet, more than one out of four households in the country turn to their 401(k) plans before retirement. In some cases, the entire account is drained in an effort to stem financial bleeding somewhere else. Early withdrawals for non-retirement reasons total approximately $60 billion per year, while 401(k) and 403(b) loans account for an additional $10 billion each year.
Not saving at all
There’s a slim chance the monthly Social Security check will be enough to secure 20 years or more of retirement expenses. The average monthly benefit is only about $1,328 in 2015, or less than $16,000 per year. The maximum monthly benefit is currently capped at $2,663 per month. Even if you receive the highest monthly benefit when you retire, you’ll likely need another source of retirement income.
Bankrate.com finds that nearly half of Americans place virtually no money aside for the future, fewer than one in four save more than 10% of their incomes, and only one in seven workers save more than 15%. Actual dollar figures tell a more alarming narrative. The National Institute on Retirement Security (NIRS) reveals the median retirement account balance totals just $2,500 for all working age American households. For near-retirement households, the median account balance is only $14,500 — not even enough to replace one year’s worth of expenses for many older adults.
No retirement planning
Hiring Uncle Sam as your primary financial planner will leave you disappointed. His advice is generic and customer support is almost non-existent. Yet Americans seem content with letting their retirement chips fall where they may.
Not enough money. Too busy. Tomorrow. These excuses might help you feel better today, but they will pillage and plunder your so-called golden years. A survey from Northwestern Mutual finds 58% of Americans believe their financial planning needs improvement, while 21% are not confident they will accomplish their financial goals. Nonetheless, 34% have taken zero steps in trying to secure their financial futures. Even worse, the majority of respondents say it would take a cash windfall to prompt better financial planning.
How can you start saving for your future self? Force yourself to save with automatic contributions, so money is automatically transferred from either your paycheck or checking account to a retirement fund. This helps remove the emotional connection we have with money and over time, you won’t even notice the transfers. The same concept is applied to Social Security taxes, but why should Uncle Sam be holding all your chips?
Follow Eric on Twitter @Mr_Eric_WSCS