Updated: Feb 8
“ Failing to plan for retirement: this is all too often a reality and most people actually do realize this.”
By: Allan R Kirby
Many experts believe you need at least one million to retire but more recently a survey from Charles Schwab highlighted that Americans believe they need at least $1.7 million, on average, to retire. Knowing this coupled with the vast amounts of information relating to retirement planning on the internet you would think most of us will be ready when the time comes, however this is not the case. For example, looking at fidelity's 401 K retirement balances by age, you can see that from age 50 to age 60 the overall balances are between: $174,100 to $195,000. These balances do not even come close to the numbers experts believe you need, even taking into account government payments such as social security, most of us are simply not achieving the expected goals.
Most people are aware that they are not properly prepared for retirement
Clearly you would think the root cause is simple, people are just not aware of the importance of retirement planning, however, I do not believe this is the case. As a matter of fact I have found that most people are fully aware that they are failing to properly plan for retirement. Additionally I honestly think they do not need to be continually reminded of this or have experts highlight their failings. I think we instead need to understand the underlying issues that are resulting in why people are not adequately planning for retirement, but what I am finding is that the factors that are affecting peoples retirement planning are complex with no single issue driving the problems.
To be sure, there is a lack of basic knowledge for many people to manage their finances and plan for retirement, but this in itself does not necessarily account for the dismal savings rate. What I am finding, however, is that the issues are wide spread, real and the data supports this. Issues such as:
Stagnant wage growth for the past number of decades. Unless you are in the high growth, high demand tech sector, wage growth has been lacking, basically the lack of disposable income can make it impossible to save for retirement.
Costs of living in many cities can be well over $300,000, which is eating into the incomes of many people, even people with high paying jobs.
Rising health care costs and a longer life expectancy will mean more retirement savings could be needed to pay for medical bills.
Increasing need to support children into adulthood while also supporting parents retiring, in fact a full 4 in 10 Gen Xers and over one-third of baby boomers are feeling this , according to Pew Research.
Increasing taxes at the local government levels are also eating into the incomes of most people, in some cases higher than inflation.
Even when people save, it may not be enough or the expected investment returns may never materialize.
“We have so many hidden costs that affect our disposable income which can affect our ability to save."
The hidden costs no one talks about:
Generally speaking, I have noticed that many experts are missing a number of rising costs that bite into people’s incomes that are real and add up. For example, schools in my area are getting parents to purchase more and more schools supplies each year and to help pay for other activities. I am finding theses fees are now running a few hundred dollars a year. Local taxes such as water and garbage pickup which are separate in my case to my property taxes have increased well beyond inflation over the past decade. Simply put if costs such as taxes rise faster than the wage gains, your percentage of disposable income is going to decrease regardless.
Looking for a higher education, well guess what, universities might be keeping tuition prices stable, but then increase fees, which are now a huge component of people’s education costs. In fact the fees you are required to pay have increased substantially more than inflation. This again puts pressure on people’s ability to prepare for retirement.
So is FIRE (Financial Independence Retire Early) a solution to retirement planning?
FIRE is not the magic solution to retirement planning. I find that it’s clearly achievable but the reality is FIRE is more of an exception than the rule. For couples or individuals with high incomes, low debt, no kids while also being extremely frugal and have the ability to invest their savings can be successful. But the reality is that for many people it’s far less possible when:
Your Income is lower.
You have kids or medical issues.
Living in high cost cities.
Have high levels of student debts.
FIRE is at best a good guide to help you with retirement planning and possibly motivate yourself into finding ways to build your retirement savings. There is no question it’s possible but for the vast majority of people, it’s not going to be possible.
“FIRE is possible, but it’s more of an exception than a rule for many people"
Some good news
Look it`s not all doom and gloom, the low interest environment has helped a little and for many lucky millennials, they may end up using the 30 trillion inheritance to get them through retirement. In other cases people could leverage their home equity along with social security to help substantially close the gap in funding required to support them during retirement. All of which are good however for most people it is still going to be a long and tough road ahead and the experts really need to start looking more closely and the underlining issues that affect retirement savings.
“The underlining issue can make it difficult for people to succeed in retirement planning"
It’s absolutely clear that people are failing to prepare for retirement, but what experts are missing is that fact that most people are very much aware of this. The reason people are failing can be attributable to many underlining broad-based issues. These issues such has high student debt and high housing costs among other things is affecting people’s disposable income and thus ability to save.