Wednesday, December 16, 2015

How Much Should You be Saving for Retirement (Or How to Know if You Are Better than Average?)

Saving for retirement is like yearly preventative doctor's visits- we all know that we should be doing it, but let's face it, for many of us we skip that yearly appointment, only to end up with a more costly Urgent Care visit later in the year for one issue or another! It's one of the many ways that we know as adults we are supposed to care for our 'future selves', but as we all know adulting is hard!

So to get at the subtitle of this post- how to know if you're better than average. Spoiler alert: we all think that we are! According to Daniel Gilbert in his book, 'Stumbling on Happiness' (a great read by the way if you are interested in the science behind what makes people happy- or unhappy) 'science has given us a lot of facts about the average person, and one of the most reliable of these facts is that the average person doesn't see herself as average'. Given the chance, most of us think we are more reliable, smarter, more good-looking etc. than the majority of the population. But how do you measure up in how you save for retirement? Are you better doing than average?

The National Institute on Retirement Security (NIRS), is a non-profit research center focused on retirement related economic issues. They recently completed a report titled "The Continuing Retirement Savings Crisis". Any bets on what it may be about? If you guessed that American's are doing fine and the future of our impending retirements is rosy, you would be vastly incorrect. Their latest study actually found that the median retirement balance for the worker bees of America out there was a measely (yup, I said it) $2,500. What can $2,500 even get you? For me, it's 4 mortgage payments, or a crummy used car. Maybe a stateside vacation? Definitely not enough to live off of for 20+ years...

What about families closer to retirement- surely those folks around their late 40's, early 50's, put things into high gear?? Unfortunately, the situation still isn't great- according the NIRS most of those family's had less than their annual year's salary saved. Meaning if the average bloke makes $40,000 a year, at retirement that same bloke would not have $40,000 in their reitrement account. To put that in perspective, most retirement calcutors suggest that to retire your family needs 8 times your annual household income saved away. Most savers haven't pocketed away even an 8th of the that!

But WAIT, there is hope- the study found that homes that had retirement accounts were more likely to save for retirement. So the take away from that data, for me, is that if you have an account set up through an employeer or a seperate IRA, you are step ahead of the pack. Just by having this fund leads you to put more money away, thus making the likliehood of you being able to retire much more feasible. While it's great if you have an employer who matches your 401k/403b contributions, according to the NIRS about 45% of houlseholds work in jobs that do not have retirement plans. If that's the case you can still open an IRA and start contribuing to account or use it as a supplement if you want to start saving more and don't want to use your company's 401k plan.

What's the relevance anyway?

For many Americans- they will have woefully inadequate savings at the time of retirment, but what does that really mean?? It means working for more years, and likely having to lower living standards. This struggle will also disproportionately impact the ladies out there, who sad to say, tend to make less over their careers, tend to have less saved overall than men, and also statistically live longer (thus needing more funds to support themselves). It may also result in a higher reliance on Social Security benefits, if individuals are not saving enough now of their own funds.

It begs the question- what if Social Security isn't around in the future?? While I wouldn't bet that it will go away completely, many experts anticipate major changes in the next 20 years to how social security opperates. Per the Social Security Administration's current projections the trust that pays retirement benefits will not have enough funds to continue to pay at the current rates, and that "three-quarters of scheduled benefits could be paid in each year"-  meaning future retirees could see a reduction of 25% in expected benefits. So long-term options for fixing the Social Security program appear agonizing simple- either Social Security payments will go down, or taxes to fund the program will rise. It could be a combination of both. Either way, future retirees can't automatically expect that the benefit amounts of today's retirees will look the same 40 years from now.*

As some may remember from my first post one of the questions I posed was looking at whether working until 65 or longer is a necessary for many Americans. According to the data, for many it will be necessary. For others they may need to remain in the workforce longer. For my family- I hope it's not. While I'm not saying that I would want to stop working - some studies are showing that stopping employment leads to a variety of issues for older adults, there is something to be said for flexibility. The idea of saving at a high % for retirement and living well below our income level, increases our likelihood of being financially independent (meaning no debt, able to pay our expenses without reliance on our 9-5 jobs). This is highly appealing to me and I'm sure is appealing to others out there as well.

I'll show you mine, if you show me yours...
...Retirement contribution rates, that is. So now it's time for show and tell. In the past 2 years we have dramatically increased our retirement contributions, in part, due to my employer increasing their matching contribution rates. For both my and Mr. Frugal Rock's retirement plans, we have made the decision to contribute the maximum amount that still receives the employer matching contribution. For example, my employer matches up to 12% of my income. If I only contributed 10% to my retirement account, I am effectively leaving money on the table. Not cool. For Mr. Frugal Rock, his company is a very small place with only a few employees, while they offer a retirement plan, it's not great- a 4% match. In addition, we have a Roth IRA that we also max out each year (there are yearly contribution limits), and are thinking of opening another one in 2016 for Mr. Frugal Rock. So our overall contribution to our retirement yearly is currently at 20% of our annual income. This puts us well on our way to that 'retirement number' I talked about earlier.

Getting to this saving % hasn't always come easy. Budgets helped. Mistakes were made. But at this point, it feels natural as the money comes out directly from our paychecks into our employeer retirement accounts, and directly from our bank accounts for our Roth IRA. Not seeing the funds, has really helped me not feel like I'm missing anything! I also think there is room for improvement with our overall savings rate and would like to see us decrease our living expenses and increase our savings... watch for my 2016 New Year's Frugal Rock Resolutions to get a sneak peek into our goals for 2016!

Are you better than average? Do you contribute to a retirement plan through your employer or through another investment company?
*I know that I'm simplifying a pretty complex issue, but ultimately, very few are arguing that the current system will function as is, in the future.

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