We talk a lot about retirement planning here at Focus Financial Group. In our blog we stress the importance of having a plan for your future and discussing your goals with a financial professional. We strive to provide useful and well-researched information that you can apply to your own financial goals in hopes that you will be better prepared when you finally cut that retirement cake and say goodbye to the workforce.
We have talked about declining Social Security balances, the increasing national debt, the unfunded liabilities of the federal government, the rising costs of healthcare, the bipolar antics of Wall Street and many other real-life issues facing multiple generations of Americans.
Why do we do this? We do this because we want our readers, our clients and anyone who cares to listen to know that they need to take these matters seriously. There is no magic that will stop time from moving forward. One day, and it may be 30 or 40 years from now, you will be staring your retirement in the face. The choices you make right now will have a direct impact on what your retirement looks like.
This Is What Life Without Retirement Savings Looks Like
About a year ago, The Atlantic published an article written by Alana Semuels entitled: “This Is What Life Without Retirement Savings Looks Like”. We encourage anyone who is concerned with what lies ahead to read this article.
The story is based on a woman named Roberta Gordon from Corona, California. Roberta is 76 years old and works at a local grocery store every Saturday handing out samples. For her efforts, Roberta is paid $50 per day. In addition to the $50 she takes home every week, Roberta receives $915 per month from Social Security and through Supplemental Security Income (SSI) – a program for low-income seniors.
Throughout Roberta’s life, she worked dozens of odd jobs – as a house cleaner, a home health aide, a telemarketer, a librarian, most of these jobs didn’t require her to pay into Social Security and certainly weren’t steady enough to allow for a pension.
“Her rent, which she has had to cover solo since her roommate died in August, is $1,040 a month. She’s been taking on credit-card debt to cover the gap, and to pay for utilities, food, and other essentials. She often goes to a church food bank for supplies.”
“More and more older people are finding themselves in a similar situation as Baby Boomers reach retirement age without enough savings and as housing costs and medical expenses rise; for instance, a woman in her 80s is paying on average $8,400 in out-of-pocket medical expenses each year, even if she’s covered by Medicare. Many people reaching retirement age don’t have the pensions that lots of workers in previous generations did, and often have not put enough money into their 401(k)s to live off of; the median savings in a 401(k) plan for people between the ages of 55 and 64 is currently just $15,000, according to the National Institute on Retirement Security, a nonprofit. Other workers did not have access to a retirement plan through their employer.”
The median savings in a 401(k) plan for people between the ages of 55 and 64 is currently just $15,000
– National Institute on Retirement Security
The Future Of Our Retirement-Savings System
Rising healthcare costs, disappearing pensions, lack of retirement savings – these are the issues facing our retirees today. But what does the future hold?
“The retirement-savings system in the United States has three pillars: Social Security, employer-sponsored pensions or retirement-savings plans, and individual savings. But with the rise of less stable jobs and the decline of pensions, a larger share of older Americans are relying only on Social Security, without either of the two other pillars to contribute to their finances. This by definition means they have less money than they did when they were working: Social Security replaces only about 40 percent of an average wage earner’s income when they retire, while financial advisors say that retirees need at least 70 percent of their pre-retirement earnings to live comfortably.”
The three pillars of the United States retirement-savings system: Social Security, Pensions/Employer-sponsored Retirement-savings Plans and Individual Savings. Of the three of those, which ones are you counting on for your retirement income?
Social Security – The Board of Trustees that administers and monitors Social Security releases an annual report that often paints a poor outlook for the Social Security program. In their most recent report, they predict that the total annual cost of the program is expected to exceed total annual income in 2020. In addition, the retirement and survivors’ trust fund is expected to be depleted in 2034. Meaning that benefits will be paid out of ongoing payroll taxes. That amount is currently projected to be 77% of promised benefits. So retirees receiving social security benefits after 2034 would see their benefits cut by 23% across the board.
Pensions/Employer Sponsored Retirement Savings Plans – There are two types of pensions, a defined benefit plan and a defined contribution plan. A defined benefit plan is a guarantee from your employer that you will receive a certain amount of money upon your retirement for the rest of your life. If you work for an employer that offers a defined benefit plan, count yourself one of the lucky ones. Since the 1980s, the number of workers that have access to a defined benefit plan has plummeted in both the public and private sectors. In contrast, a defined contribution plan is a guaranty that your employer will contribute a certain amount of money into a retirement account (like a 401(k)) each year with no guarantees that it will be worth anything by the time you retire.
Individual Savings – Perhaps the most important factor in building financial security is your individual savings. The sooner you get in the habit of saving a little each month from your income, the better off you will be in retirement. So how much should you save each month? A good rule of thumb is based on the 50/30/20 rule which says you should spend 50% of your income on essentials like rent and food, 30% of your income on discretionary spending and 20% towards your savings. This is not a hard and fast rule, however, and depending on when you start saving for your retirement, your numbers might be more, or less, than 20%.
Chances are you know someone in the same situation as Roberta. Maybe someone close to you that has been forced to go back to work to make ends meet in their retirement years. Do you know that sort of tired, achy feeling you get after a hard day’s work? Imagine what you’d feel like at 76 after being on your feet all day.
This is the reality of the future we’re facing if we don’t take steps to save for our retirement. We can’t depend on pensions. We can’t depend on Social Security. The truth is we can’t depend on anyone but ourselves to make absolutely certain that our retirement years are what we want them to be.
What are your priorities
We all have priorities in life. They may not be written in stone, but we know what they are. Some of our priorities are inherent, like food, shelter, security. Some of our priorities are a bit more flexible and often depend on other factors in our lives, like children, education and work. However, there are still other priorities that we set based on our own personal preferences. These are usually the things that we choose to spend our time or money on because we like them. Often, it’s these things that eat up funds we could otherwise be saving towards our retirement. It’s the things we don’t need that can prevent our future-selves from being financially secure.
Stop and think for a moment about the things you spend your money on. It could be something big, like that new car in the driveway or the flat-screen tv in your bedroom. Or it could be something small like the price of that Caramel Macchiatto that you have every morning on your way to work. Whatever it is, it’s time we started asking ourselves if it’s really necessary. What does $5 per day that we spend at Starbucks look like in 20 or 30 years? Have you ever done the math on this?
We’ll do it for you:
$5.00 x 5 days = $25.00 per week
$25.00 per week x 20 years = $26,000.00 …on coffee.
Now for the fun part:
Take that same $25 per week x 20 years @ 7% interest compounded annually and you will have close to $55,000.00 in your account. Now, if you did that for the next 30 years you’d have $126,000 saved towards your retirement. That’s pretty good for just cutting Starbucks out of your daily routine.
When you choose to save for retirement, you’re choosing to give up the least important expenses in your life right now in order to have a much better life in retirement. You’re having friends over to your house instead of going out somewhere. You’re turning the lights off when you leave the room. You’re buying store-brand instead of name-brand groceries. You’re brewing your own coffee instead of giving your money to Starbucks every day. These changes won’t have a huge impact on your quality of life today, but they will make all the difference in your retirement.
So what if you could free up $50 per week by making some small adjustments to your lifestyle? If you put that $200 per month in a secure retirement vehicle earning 7% compound interest, you’d have over $109,000 in 20 years or $251,000 in 30 years!
Now some of you may be thinking, “I have plenty of time to start saving for my retirement. I’m going to enjoy myself now and worry about it later.” To you, we say, the longer you wait, the more you need to set aside every month when you do get started. The power of compounding is tremendous but it takes some time to really get going. As you can see from the example above, $109,000 after 20 years turns into more than double that in the next 10 years. That’s the power of compounding.
In our examples, we used some pretty small numbers to make our point, but going back to the 50/30/20 rule, where we mentioned that you should be saving 20% of your income, the numbers will most likely be much higher. Use a compound interest calculator (like this one). to see what 20% of your income will look like in 10, 20 or even 30 years from now.
It’s time to give some serious consideration to your future
If you have already started saving for your retirement, our hats off to you. You are doing better than the majority of workers in this country. But what you need to ask yourself is this: “Am I doing enough? How much money will I need in retirement to live comfortably? Are there areas in my life that I could trim some fat from and put more money towards my future?” You should also think about what you’re doing with the money you are saving. Ask yourself, “Am I putting my retirement savings at risk in the stock market? Am I exposing my retirement savings to future tax-rate increases by contributing to a tax-deferred retirement plan? What will happen to my family if something happens to me?” These are all things you should be discussing with your financial professional as the next step in your overall financial plan. A good financial professional will help you answer these questions and ensure you are staying on track to achieve your retirement goals.
For those of you that haven’t started saving, it’s not too late, but we strongly encourage you to get started as soon as possible. It’s literally for your own good. All signs point to a future where the three pillars of retirement-savings could be chiseled down to just one – Individual Savings. Don’t put your future in the hands of someone else. Take control of your finances and your future. By making small adjustments to your current lifestyle, you could be building a solid foundation for your future-self.
Now imagine yourself in your retirement. You aren’t forced to work to make ends meet. You can do the things you want to do. You can rest when you want and travel when you want. You can spend time with family instead of at work. You don’t have to worry about where your next paycheck is coming from. You know exactly how much money you have because you planned it that way. You had the discipline to prepare for this very day and every day until the end of your days – You are free.
Of course, nobody can say for certain what the future holds, but you have the ability to take some of the uncertainty out of your future. Don’t wait, get started TODAY! The sooner you start saving, the less of an impact it will have on your day-to-day life. If you don’t know where to begin or have questions about how to get started, give us a call. We will be glad to discuss your situation and offer advice on where you should go from here.
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Focus Financial Group
Focus Financial Group has investment and retirement strategies that are designed to maximize your growth and minimize your risk. Our tax strategies reduce and often eliminate the tax liability on your retirement savings so you can take control of your money now and in the future. Building wealth and providing security for your family are just a few of things we do here at Focus Financial Group. Our mission is to help you achieve your financial goals, whatever they may be. We have helped clients from all walks of life and circumstances safely and securely grow their money. Whether it’s retirement planning you’re focused on or saving money to put your kids through college, we have solutions for that. Let’s start with a conversation about where you want to go and then make a plan to get you there. Consultations are always free so contact one of our experienced financial professionals today and get started down the path to financial peace.