Credit: Shutterstock photoSaving for retirement, an admirable aim, has lots of obstacles. The overall economy is to blame for some, government rules for others and employer tightfistedness for still others. Retiring at 65, which is the traditional goal, is for many a pipedream.
Today, people are living longer in part because of less physically demanding work than in the past and better health care throughout life. Many people are choosing to work longer, many because they have to, not because they want to.
The average family currently saves about 11.2% of their paycheck, with 5% in contributions to a defined contribution plan, such as a 401(k) or 403(b), and another 6.2% toward Social Security.
As good as this seems, the sad fact is the average family is going into debt faster than it is saving due to the cost of educating the children, paying off their own education loans, taking care of an elderly parent, living for today and not enough for tomorrow. People in this situation often are referred to as debt savers, i.e. borrowing more than they save.
That means many must work longer. But several benefits stem from more years in the workforce. First, there is more time to accumulate retirement savings, and second, you put Social Security benefits on hold until age 70, so you get a fatter payout. Working longer means fewer years in retirement and, thus, you do not need as much money to retire.
What can be done to overcome the problem of inadequate savings? Congress tried to combat this back in the mid-1970s, when they introduced the individual retirement account. The IRA, back then, allowed any worker to set aside up to $1,500 per year. At the time, that was a lot of money.
It is hard to conceive that Congress could pass legislation requiring workers to set aside a mandatory amount to a 401(k) program at work or perhaps in a government sponsored plan.
The closest Washington came to prompting people to save was in 2006, when it passed a law allowing 401(k) plan sponsors - namely employers - to automatically enroll new employees into the plan, and start with a 3% contribution level that goes up to 5% over a few years. The employee must opt out of the plan rather than opt in. For plans with this provision, more people are participating and more is saved.
Trouble is, higher 401(k) savings are not enough without basic thrift. According to a survey by financial software firm HelloWallet , 20% of households with 401(k)s or other such accounts added more to credit card debt than they contributed in retirement savings in 2010 and 2011. If something doesn't happen soon, the situation will deteriorate even further.
Another obstacle is that the 401(k) employer match, which shriveled in the wake of the 2008 cataclysm, has made only a partial comeback, according to a recent Transamerica report on retirement plans .
As the financial crisis spread, many employers reduced or eliminated matching employer contributions. That was an easy way for employers to harbor cash. The thinking was that, the higher the percentage match, the more there was to pare and thus realize bigger cost reductions.
Now, many are reinstating the match, but with an important difference. In the past, many employers who really wanted to help their people often matched half of the first 6% of salary employees put away. That meant someone making $50,000 who saved $3,000 into the 401(k) got an employer match of another $1,500. The extra money was hard to turn down.
But once the match stopped, many employees quit putting more into the plan, to the detriment of their own retirement savings. Lately, while many employers are willing to put the same dollars into the plan, the formula for matching is one-quarter of the first 12%. Overall, however, the new arrangement doesn't turn out to be as generous.
Employees willing and able to put 12% away are getting the same number of dollars from the company. But if they don't, or can't, then the employer is obviously saving money by not matching as much.
Meanwhile, Social Security benefits are no bonanza for retirees, and show little sign of enriching the payouts. Some 36% of Americans age 65 and over rely almost solely on Social Security for their income in retirement. The average recipient gets $1,269 a month.
The Social Security Administration just announced that benefits won't increase in 2016. Reason: inflation is too low, and the hikes track it. In 2010 and 2011, benefits had no cost of living increase either. Odds are that Medicare costs will increase, although not by 50%, which was the case prior to Congress' budget deal.
Follow AdviceIQ on Twitter at @adviceiq.
V. Raymond Ferrara, CFP, CSA, is president and chief executive ofProVise Management Group LLCin Clearwater, Fla.
This material represents an assessment of the market and economic environment at a specific point in time. Due to various factors, including changing market conditions, the contents may no longer be reflective of current opinions or positions. It is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Please remember that past performance may not be indicative of future results.
AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
