Do we have a retirement saving crisis? The retirement financial guys certainly think so. The National Institute on Retirement Security’s ongoing research* shows that we are in bad shape collectively. There hasn’t been much improvement even after a long period of economic stability. Retirement saving is still dangerously low especially for almost everyone. 90% of the households with higher income have retirement account, but the median balance is still pretty low. Let’s take a look at the data.
*I originally wrote this article in 2013. I’m updating this post with the 2015 report.
From this data, it looks like we’re officially in crisis mode. The near retirement households are going to be in serious trouble after they retired. The median retirement account balance for people 55-64 (who has retirement accounts) is $104,000. That might sound like a lot of money, but it could be gone in just a few years. What about those folks without retirement accounts? Their median balance is just $14,500. That’s up from $12,000 in the previous report, but it’s not even close to being enough for one year of retirement. If you have only $14,500 saved up at 65, then you are going to be in for a very long frugal retirement. Those households will be dependent on Social Security benefits and other public programs. One little emergency can screw up their finance and push them over the brink.
It’s a tough situation for the working class. When you’re not making a lot of money, saving for retirement is put on the back burner. I remember when my family immigrated to the US. My parents barely made enough money to pay the bills and they couldn’t save any money for a long time. Today, they don’t have a lot of retirement saving, but their expense is very low so it’s not too bad. My dad lives in Thailand and has some income from renting out his condos. He spends about $1,000 per month and live a comfortable lifestyle there. My mom lives with us and she doesn’t spend any money. Her biggest cost is healthcare, but it’s not too bad at this point.
The key research findings are as follows: (from NIRS’s website)
- Account ownership rates are closely correlated with income and wealth. Nearly 40 million working-age households (45 percent) do not own any retirement account assets, whether in an employer-sponsored 401(k) type plan or an IRA. Households that do own retirement accounts have significantly higher income and wealth than households that do not own a retirement account.
- The average working household has virtually no retirement savings. When all households are included— not just households with retirement accounts—the median retirement account balance is $2,500 for all working-age households and $14,500 for near-retirement households. 62% of working households age 55-64 with at least one earner have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement.
- Even after counting households’ entire net worth—a generous measure of retirement savings—two thirds (66 percent) of working families fall short of conservative retirement savings targets for their age and income based on working until age 67. Due to a long-term trend toward income and wealth inequality that only worsened during the recent economic recovery, a large majority of the bottom half of working households cannot meet even a substantially reduced savings target.
- Public policy can play a critical role in putting all Americans on a path toward a secure retirement by strengthening Social Security, expanding access to low cost, high quality retirement plans, and helping low income workers and families save.
All right, so we see that the average household is doing a terrible job at retirement saving. However, I’m sure that anyone who is reading Retire by 40 is way above average. All you need to do is max out your 401k and Roth IRA contribution for a few years and you’ll be way above average for your age range. That’s easy to say, but not everyone can do this.
What if you really can’t save for retirement?
Of course, it would be ideal if you stashed away a million dollars in your retirement account, but many of us can’t do that. I have been saving and investing in my tax-advantaged accounts for 20 years and they are only worth about $600,000. That’s after a very long bull market.
The numbers look bleak, but it’s not hopeless. People all over the world retired with much less than $100,000 saved. Let’s brainstorm and see what alternatives there are for households without a lot of retirement savings.
- Make money doing something you enjoy – If you can make money doing something that you enjoy, then you probably don’t need as much retirement saving. You can keep doing what you like and you’ll have some income to cover the expenses. Ideally, this should be self employment so nobody can fire you. Nobody can work forever, though. Most people have more health issues as they age and eventually they can’t work anymore. Working after retirement is only a short term fix.
- Build up multiple streams of income – Some people don’t have much money in their retirement accounts, but they have other ways to generate income. Rental properties, dividend stocks, and peer to peer lending are just a few ways to generate some income. There are also many other part time gigs such as house sitting, dog walking, mystery shopping, and blogging that could make some money when you have more time.
- Cut cost by relocating – This is a great option that most Americans rule out. You can have a great retirement in South America or Southeast Asia with a very modest budget. In fact, I plan to do just this when our kid goes off to college. We can explore new cultures and scenery while saving money. This is 13 years out though so we’ll see if it pans out. Also, many locations within the US is quite inexpensive. If you live in the expensive part of the country, you’ll be able to reduce your cost of living drastically by moving to a cheaper location.
- Leverage your family – If you can’t count on family, who could you count on? Raise your kids with family values in mind and count on them to help out when you’re older. Combining households is a great way to save money for everyone and it’s also really nice for kids to know their grandparents better. My mom lives with us for 8 months per year and it’s a good situation. She can help babysit occasionally and we can make sure she is healthy. Our kid also knows that we are taking care of her and expects him to do the same for us if needed. Hopefully not, but you never know.
So yes, we do have a retirement saving crisis on our hands. If you’re young, you need to start saving now. The earlier you start investing, the better off you’ll be in the future. You can be even more ambitious and shoot for financial independence. Trust me, life is much better after you’ve achieved FI. If you’re close to retirement and haven’t saved enough, then you will have to be flexible and think creatively. Depending solely on Social Security benefit will be a tough way to live. I’m sure most people can’t maintain their lifestyle with just the Social Security check.
What would you do if you’re 65 with only $14,500 saved?
If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. They can help you keep track of your investments, income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.