Saving for retirement is a monumental task. Unfortunately,
today's chronically low savings rates suggest that too many
Americans don't take it seriously enough.
The better people understand the challenge of saving for
retirement today, the more likely they are to focus on it. Here are
five hard facts on retirement that illustrate that challenge.
1. At age 65, Americans live for an average of 18.7 more
years
In other words, retirement is not just a few years tacked on after
the end of your career. The likelihood is that it will represent
20-25 percent of your entire life. That's a long time to live off
of savings, and remember, roughly half the population
lives longer than the average life expectancy
, so you may need replacement income for more than just that
18.7-year average.
2. Inflation cuts the value of your money in half every
22 years
For nearly 100 years, U.S. inflation (as measured by the Consumer
Price Index) has gone up at an average rate of 3.21 percent a year.
At that rate, prices double every 22 years. Therefore, if you are
21 years old, you are likely to see prices double twice by the time
you reach the retirement age of 65. Because of the compounding
effect, this means things will be roughly four times as expensive
at that point (i.e., a $1 item would double to $2 in the first 22
years, then that $2 would double to $4 in the second 22 years).
So, if you are 21 now and think that $25,000 would be a
reasonable amount of income in today's dollars, you had better plan
to save enough to provide $100,000 a year. Of course, given the
average life span discussed above, you can also expect to see
prices nearly double yet again during your retirement years.
3. Bank accounts produce a fraction of the income they
used to generate
Prices may be rising inexorably, but
CD
and savings account rates have been heading in the opposite
direction. According to figures from the Federal Reserve, five
years ago a $100,000 short-term CD would have generated $4,780 in
annual income. By late 2012, that same CD would generate only $190
in annual income. Low savings account rates mean you have to save
more money to produce retirement income.
4. The average Social Security retirement payment is just
$1,220 a month
If you think Social Security will provide for you in retirement,
you had better plan on a very low standard of living. That average
retirement benefit comes to less than $15,000 a year. That can be
an important piece of the retirement puzzle, but if you don't
supplement it with some retirement savings of your own, you'll find
Social Security
is pretty thin as a sole means of support.
5. The average cost of an assisted living facility is
close to $40,000 a year
You can just about double that for a nursing home. The mismatch
between these figures and the typical retirement benefit from
Social Security underscores why some personal retirement savings
are so essential.
Coping with these challenges takes an early, consistent and
meaningful effort. The above realities won't just go away if you
ignore them -- they'll simply wait to blindside you when you
retire.