Over half of workers who are actively participating in 401(k)-type savings plans are accumulating debt faster than they are building their retirement nest egg. And a new survey of U.S. workers and retirees just released by the Employee Benefit Research Institute shows more than one-third of workers have less than $1,000 saved for retirement; more than half have less than $10,000 set aside.
Think about that for a minute. Denial or hoping to win the lottery are becoming the basis for retirement “planning.” Is it any wonder we have an impending retirement crisis?
The rules of retirement saving have changed dramatically in just a couple of generations. Many who retired 20 or 30 years ago were participants in a defined benefit pension plan. Their employer contributed to a plan during their working years that would provide a guaranteed monthly income after retirement.
That pension combined with Social Security and some personal savings provided a comfortable income for the “golden years.” Today you need to take an entirely different approach to retirement savings than your parents and grandparents did. The defined benefit pension plan (and the security it provided) is a relic of the past for most of us – now, your retirement is on your shoulders.
How to get started
The hardest thing about building retirement savings is starting. Take a page from Uncle Sam. In the 1950s, the IRS started requiring employers to withhold a certain amount from each paycheck to cover the taxes expected to be owed for that year. Most workers found this easier than coming up with a lump sum at tax time.
Likewise, you should take advantage of salary deduction to contribute to your 401(k) plan. If you have no plan at work, you can set up a regular transfer from your checking account into an Individual Retirement Account (IRA) or investment account.
Strive to avoid debt
Your goal should be to eliminate debt, not build it as you approach retirement. Once the mortgage is paid off, avoid the sales pitch directed at borrowing that equity in the form of a reverse mortgage to put money into a high commission annuity, insurance or investment product. A reverse mortgage should only be used as a source of last resort for supplemental income in the latter years of retirement.
Let time be your ally
Let the time value of money and compound interest work to your advantage as the years go by. This is a huge advantage to young workers just starting out. We are big proponents of the 50/30/20 rule: If you can establish the habit early of directing 50 percent of your income to needs, 30 percent to wants and 20 percent to savings, you’ll be on your way to a successful financial future.
The sooner that workers recognize the hard truth that this is clearly a matter of taking personal responsibility for your own future financial security, the sooner we as a country can start addressing the problem – and implementing solutions.