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Start Saving for Retirement Yesterday

Social security alone will not get us through our retired years

Saving for Retirement

There’s a pending catastrophe in this country whose origins began in 1946 and ended, roughly, in 1964. These are the baby boom years. The war was over, and men and women wanted to get on with their lives and start building their futures. They did so by, among other things, having children. Lots of children. It’s estimated that today there are somewhere between 70 and 80 million baby boomers in the country. Some are quite old; others are just now entering their sixties.

These individuals have been putting a strain on several key social safety net programs put in place, in many ways, dating back to the Franklin D.Roosevelt administration but also back to President Lyndon Johnson and his Great Society initiatives in the 60s. These include, principally, Social Security and Medicare. The latter of these is not so much the subject of this piece. The former, Social Security, is.

Saving for Retirement

The average Social Security monthly payout is slightly under $1,500 dollars. Think about that for a moment. Let’s say you had an on-and-off working career, for whatever reasons. Or say that your lifetime wage was never what anyone would call generous. Either of those translates to a low Social Security payout. (An important component of your Social Security payout is predicated on lifetime earnings.) And even if your Social Security payout is considerably larger than the average, unless you have access to significant other financial resources, most of your income in retirement will derive from Social Security. You may have a pension, and if so good for you. You may have a fat 401(k) account—good for you, too.

But no matter your income, and no matter your sources of income, these days you can expect to live a long time after you turn 60-years old. A 60-year old male who does not smoke is expected to live to slightly beyond age 84! That’s 24 years. And during those 24 years, if you represent the average individual, you will get sick and sicker (not meant to be depressing but an expression of reality). So even though Medicare, assuming it goes largely unchanged from today, will cover most of those expenses. But not all. Even with Medicare, you’re still responsible for a portion of your medical bills and monthly payments into the system.

Social Security was never meant to be the principal source of income in a person’s retired life. It was meant to augment other sources of income—income from retirement plans, IRAs, personal savings and investments. All of these, even though they have existed only for about the last 40 years or so. But the proliferation of retirement programs, set in place by the Employee Retirement Income Security Act (ERISA) of 1974, has not provided the relief many expected.

From Nerd Wallet, here’s a 401(k) account balance by age groups:

Ages 20-29:

Average 401(k) balance: $11,600.

Median 401(k) balance: $4,000.

 Ages 30-39:

Average 401(k) balance: $43,600.

Median 401(k) balance: $16,500

Ages 40-49:

Average 401(k) balance: $106,200.

Median 401(k) balance: $36,900.

Ages 50-59:

Average 401(k) balance: $179,100.

Median 401(k) balance: $62,700.

Ages 60-69:

Average 401(k) balance: $198,600.

Median 401(k) balance: $63,000.

It is, of course, not surprising that the higher your age, the higher your account balance. But still, look closely at the numbers and you’ll see that savings through our retired lives are woefully low.

Again, from Nerd Wallet: the average IRA balance is approximately $97 thousand. Of course, not all (401(k) savers have IRAs.

Saving for Retirement

So, imagine this: You are age 59 and you have $179 thousand in a 401(k) and $97 thousand in an IRA. That’s $276 thousand in savings for retirement. This same individual is, actuarially, likely to live another 25 years. Assuming no growth in any of these accounts, or loss, that leaves this hypothetical individual with slightly over $11 thousand per year to live off. Then, add in the average Social Security balance and this individual is “earning” a monthly income of slightly over $12 thousand. This will barely cover the rent on a one-bedroom apartment in most cities and even in rural areas.

There’s a moral here and it’s shockingly obvious. Baby boomers will likely not have enough time to save sufficiently for retirement. Starting at age 60 is too late; it’s also too late to start at age 50. This post is not meant to address any legislative changes that may need to be instituted to assist these individuals. Maybe our lawmakers will somehow take this issue up, or maybe not.

But no one should rely on help from that arena.

Start saving for retirement as early as possible. Encourage younger individuals to begin to save now for retirement (although that can be a daunting task; we generally do not do well at thinking this far ahead when we’re younger).

Here’s an example:

 

Initial Deposit Savings Frequency/Amount Years Rate of Return Amount Earned/Saved
$5,000 Monthly/$100 5 7 percent $13,923
$5,000 Monthly/$100 10 7 Percent $26,429

 

In this scenario, saving an additional five years more than doubled the five-year savings total. This reflects the power of saving for retirement as early as possible. The trick is to do so wherever possible in tax-advantaged arrangements such as employer-sponsored retirement programs, IRAs, Roth IRAs, Keogh if self-employed—any of these is good and will help you significantly in your retirement years. And it’s almost never too late: start today, whether you’re 35 years old or 65 years old.

As the expression goes, you’ll be glad you did.

 

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