Articles about working your way toward a comfortable retirement or enjoying one are ubiquitous. If you earn a respectable income and are a good saver and investor, they can be fun to read and are usually realistic.
Unfortunately for most Americans, however, images of a gray-haired coupled sipping spiked Arnold Palmers on the balcony of their high-rise, ocean-front hotel someplace in Hawaii and contemplating how to spend a piece of their latest annuity check is an unrealistic scenario. The money simply is not there, whether their incomes were too low or they were poor savers or both.
According to the National Institute of Retirement Security, almost 40 million households have no retirement savings at all. The chief income source for many of them is Social Security, which for the average American averages only about $1,375 monthly.
And yes, for those with some sort of nest egg, things are better – but still typically not that great. According to a study by the Federal Reserve, average retirement accounts have only about $200,000. That may sound pretty good, until you consider that a retired couple’s medical costs alone are typically almost this much.
For these folks and others, financial retirement prospects don’t have to be bleak if people wake up to this issue and develop more spending discipline by the time they reach middle age and preferably before. This will be addressed in a bit.
First, though, it’s important to note that too many Americans believe that life in retirement, especially if you don’t live in a big city, is much less costly than work-a-day life. It is less, but not by that much. Statistics from the U.S. Bureau of Labor Statistics shows that households run by folks 65 and older on average spend $45,756 a year, or roughly $3,900 a month. This is about $1,000 less than the monthly average spent by all U.S. households combined.
So why don’t Americans’ average retirement savings match what financial planning experts say they should have? Estimates vary, but they are seldom less than $500,000 for a couple – and that’s stretching it when you consider that many retirees commonly live for years into their 80s and, increasingly, make it to their early 90s.
There are essentially two reasons why so many Americans are ill-prepared for retirement.
One is that many people have a so-called “present bias”, or the tendency to overvalue immediate rewards at the expense of long-term intentions, especially when they can be decades away. Americans also fall short on retirement savings because they don’t earn enough to live a relatively normal life and simultaneously save money. Most family expenses typically include child care, car payments and mortgages, and, increasingly, long-term student loan payments. It doesn’t help that pay raises have barely tracked the inflation rate for more than a decade.
As it turns out, many middle-aged adults have begun rethinking their retirement plans and saying they may delay retirement and in some cases never stop working, according to the prestigious Pew Research Center. This sounds like an answer but may not be. Some Americans may not be able to work into their late 60s and 70s, either because the work is too physically demanding, or their employers won’t want to keep them on. Many companies aren’t interested in retaining old white-collar workers, either.
Fortunately, the financial retirement picture doesn’t have to be as bleak as it seems. The answer is to adjust your budgeting sooner, rather than later, and to regularly put away a modest amount for retirement.
Here are 7 key tips to help achieve this:
- Become financially disciplined. Find a way to consistently save 10% of your income. Tucking away even a small amount might qualify you for tax benefits, guarantee a hefty employer match through a 401(k) program and enable compound interest to work on your behalf.
As part of this, establish a “micro savings strategy” – i.e., break down a macro, or big, goal into a smaller, financially feasible micro goal. Don’t say, for example, you want to save $5,000 or even more this year. Instead, save $100 per paycheck as a starting point and work to do so routinely. Then, every few months, work to gradually increase this amount.
- Keep housing costs at bay. These are usually your biggest expense and can easily drain budgets. Don’t buy (or rent) a home that is more than you need, even though housing prices are rising. You may not be in a position to dent your cash flow. If possible, you may also want to consider renting a room, even weekly via Airbnb.
- Get out of debt and stay out. If you’re carrying the average credit card balances per U.S. adult of $5,232, you’re giving $729 a year to credit card companies, thanks to interest charges. This money should instead go into savings.
- Keep a lid on entertainment expenses. Terminate your daily habit of going to Starbucks for coffee and a fancy muffin. Have potluck dinners at home with friends instead of gathering with them at a restaurant. Have movie nights at home, complete with popcorn and soda. And take advantage of free forms of entertainment, such as hiking and bicycling.
- Learn to buy only when necessary. Unnecessary expenditures destroy budgets. Commit to avoiding unnecessary expenditures until your retirement savings account has been built up properly. And when you do buy, buy on sale.
- Get a handle on grocery expenditures. The monthly grocery budget for an average family of four is nearly $1,000. This is costly. To cut it, plan weekly meal menus around what is on sale. Avoid frivolous food purchases, such as soda and chips. And if you don’t already, learn to cook from scratch instead of buying pre-made or processed meals.
- Automate your savings. This is the easiest way to save money, regardless of your income. Having a specified dollar amount transferred from your paycheck into your retirement savings account before you even see it enables you to save money with the least effort.
Nobody would say any of these tips are a slam dunk. But they are doable, and they work. Discipline is part and parcel of the life of every, even modestly, successful person. In this case, the payoff is a comfortable retirement. Who wouldn’t want that after working hard for decades?
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