October 18-24 is National Save for Retirement Week – a reminder of the importance of saving and investing with the goal of a comfortable future.
Are Americans saving enough for tomorrow? All kinds of articles will tell you that Americans are not. Those articles may not be telling the entire story, however.
Undeniably, the average IRA balance in this country is smaller than it should be. According to the most recent quarterly survey data from Fidelity Investments, it was $96,300 at the end of June. The average balance in the common employer-sponsored retirement plan was about the same at that time, Fidelity found – $91,100.1
The picture looks better when viewed by age group. After studying 25.8 million IRAs, the Employee Benefit Research Institute recently announced an average IRA balance of $122,957 among IRA owners aged 55-59. It was $165,139 for IRA owners aged 60-64. In its last yearly study (end of 2014), Vanguard determined that the typical employer-sponsored retirement plan account held by an employee aged 55-64 had a balance of $180,771.2,3
Consider the above statistics. Can you retire on $181,000? That would be a challenge. How about $181,000 plus another $165,000? Not exactly an ideal retirement savings amount, but more than many others have. Now factor in business wealth. Add housing wealth. Add inheritances. Things start to look brighter – but not for everyone. The sad fact is that many Americans lack access to retirement savings accounts and/or the ability to contribute to them.
The good news? Retirees may have more money than some analysts think. As a July Forbes article noted, the Social Security Administration reports total U.S. retiree income in its Income of the Aged publication, based on data from the Census Bureau’s Current Population Survey. Economists and journalists cite this publication as proof that retirees rely too much on Social Security, and that IRAs and workplace retirement plans are poor retirement saving vehicles.4
Few of these economists and journalists seem to realize that the CPS has been underreporting retiree income for decades. It does not count annual distributions from IRAs and workplace retirement plans as retiree income, only pension-style payments from Social Security and other sources. For example, the CPS calculated $5.6 billion in individual IRA income during 2008, while retirees reported $111 billion in IRA income that year to the IRS. Just recently, the CPS altered its questions to try and improve its retirement income reporting.4
Saving for retirement early cannot be emphasized enough. In fact, when you start saving may have more of an impact than how you save and invest. This has to do with compounding.
Thanks to compounding, a young adult who regularly invests $500 a month starting at age 25 would become a millionaire at age 65 if his or her investments yielded but 6% annually. Impressive? Yes, but here is an even more eye-opening statistic (from J.P. Morgan Asset Management research). A young adult who defers $5,000 a year into a retirement account annually from age 25-35 ends up with $602,070 at age 65 (assuming a 7% sustained annual return) even if he or she contributes nothing to the account after age 35. Moreover, even though that investor quits saving at 35, the $602,070 he or she accumulates by age 65 exceeds the $540,741 in savings that would be amassed by someone investing from age 35-65 under the same set of conditions.5
If you are behind, you must strive to catch up. Some people start saving for retirement after 40, or after 50. Others have to resume or rethink their effort at midlife due to divorce, business failures or other predicaments. If this applies to you, what positive steps can you take?
First of all, see if you can max out the retirement accounts you have (or those you will start). Remember that larger “catch-up” contributions are often allowed after age 50. (Can you take advantage of employer matches?) With new money regularly flowing into your account, decent yields and a little compounding, your current, minor savings may become much greater by the time you retire. Along the way, see if you can reduce or eliminate debt – home loans, car loans, credit card balances – and resolve to let your kids pay their way through college. After all, there is no retiree financial aid.
Now is a good time to review your retirement savings effort. Turn to a financial professional for insight. Talk about your vision of retirement. What does it look like? What would you like to do? What would you like to accomplish financially before you retire, so you no longer have this or that money concern when you start your “next act”?
That kind of conversation can help you gauge the “distance” remaining toward your retirement money goals. You may need to save more. You may be in better shape than you think. You should definitely find out where you stand now, rather than later.
John Dombroski, Jr. may be reached at 480-991-1055 or firstname.lastname@example.org
Securities and Advisory Services Offered Through Client One Securities, LLC Member FINRA/SIPC and an Investment Advisor. Grand Canyon Planning Associates, LLC and Client One Securities, LLC are not affiliated.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
- 1 – http://www.pionline.com/article/20150731/INTERACTIVE/150739976/average-401k-and-ira-balances-as-of-q2 [7/31/15]
- 2 – money.usnews.com/money/retirement/articles/2015/07/06/how-your-retirement-account-balance-compares-to-your-peers [7/6/15]
- 3 – fool.com/investing/general/2015/01/05/the-average-american-has-this-much-saved-in-a-401k.aspx [1/5/15]
- 4 – forbes.com/sites/andrewbiggs/2015/07/09/good-news-retirement-income-still-being-undercounted/ [7/9/15]
- 5 – businessinsider.com/amazing-power-of-compound-interest-2014-7 [7/8/14]