Americans Still Not Ready for Retirement

Here's some information that's a good follow-up to our discussion about Americans not being ready for retirement. We'll start with a summary of how most people fund their retirement.

Americans typically build retirement savings in three ways, says Laibson. For all of us, our required contributions to Social Security will provide a guaranteed monthly check. Owning a home and gradually paying off the mortgage during your working life generates housing wealth that supports retirees' standard of living (if you've paid off your mortgage, you don't have to pay out of pocket for housing). Finally, company plans, such as 401(k)s and defined pensions, provide the other key source of financial support in retirement.

So, the three-legged stool for retirement is Social Security, having a home paid off, and company plan (aka "personal savings" in my book), huh? Sounds right to me. I'm not counting on receiving anything from the first option and I already have my home paid off. So my entire focus right now is saving up as much as I can in both my 401k as well as in other personal accounts.

Of the three legs, there's one that is more important than the others in determining retirement savings success:

Laibson, who studies retirement issues as well as the psychological factors influencing savings behaviors, observes: "The most important driver (of whether an individual ends up retirement-rich) is the savings institutions at the workplace."

About half of all private sector employers don't offer any type of 401(k) or pension plan. That's a big reason why some 60 percent of Americans aren't building the savings they'll need.

"If their workplace isn't helping them save, they're not doing it on their own," Laibson says.

Of the rest, some 30 percent are saving just about adequately and 10 percent will wind up retirement-rich, according to Laibson. His estimates aren't based upon his own research, but rather upon sifting through dozens of research reports and integrating the findings.

Ok, a few thoughts here:

1. While not having a mortgage is key to a good retirement, four in ten people aged 60 to 69 have a mortgage. Oops.

2. Basically, I'm getting out of this that people don't have the motivation to save on their own. If their company doesn't force/encourage them to save, they don't do it.

3. 60% aren't saving enough. I'd say that's a big problem.

4. 10% are "saving too much." How actually is that done? Can't they run the numbers and simply retire earlier if they are indeed "saving too much"? For instance, if someone is 40, wants to retire at 65, and at his present rate of savings will have enough to retire at 60, why doesn't he simply do so (and is he really saving too much up to that point)?

Another way of looking at it is that he is not saving too much until he gets to 60 and keeps saving at his current rate. At that point, he's "saving too much", not when he's 40. Or looked at from a different perspective (one I prefer), he's building in a margin of safety with his retirement saving. It's much easier to give some away once you have too much than it is to save too little then try and earn more with limited opportunities and potential health problems at age 70.

Comments

[DCS]

This seems like a semantics issue. The author says "too much" is more than the amount required to maintain current lifestyle. But since when does more than the minimum equal too much? To me, "too much" means to an extent it becomes detrimental. What the author calls "too much" I would call "more than enough" but "Could you be saving more than enough?" isn't much of a grabber as far as headlines are concerned.

Also, while I agree having no mortgage in retirement is important, and I understand what the author was trying to say, I love the statement "...if you've paid off your mortgage, you don't have to pay out of pocket for housing." Ha ha! Then why do the city treasurer, roofer, furnace tech, handyman, garden center clerk, hardware store owner, exterminator, insurance agent, etc. always have their hands in there?

[kenyantykoon]

the question is not whether they are ready for retirement, the question is whether they are able to retire. Everybody even a twenty year old is ready to retire but due to unavoidable circumstances this is not possible. This is for most people anyways, not for those with too much in their accounts

[Crystal]

In my world, saving "too much" is impossible unless you are starving yourself or something in order to save. I'm with FMF, saving more than you need to is called "funding an early retirement". :-)

[Funny about Money]

uhhh.... Saving too much?

Well, I suppose if you have a lot of debt and you're stashing more than you absolutely need to stash when you could be saving an adequate amount and using the rest to pay off the debt, that could be seen as "too much."

IMHO, there's no such thing as saving too much for retirement, because the effect of inflation can be a great deal harsher than most of us imagine.

My father saved frenetically so he could retire as early as he could, and indeed he reached his goal along about 1962. He retired, discovered shore life cost more than he realized (he was a Merchant Marine officer and so had no real concept of what cost my mother to live off the boat), went back to sea for a few years, then finally quit shortly before the end of the decade.

Then came the 70s and double-digit inflation.

The amount of his savings -- which in the late 60s was plenty of money -- quickly lost so much value it barely kept him alive. Luckily the government recognized men who had been merchant mariners during WW II as veterans and so he had a small benefit from that, and thank God he had Social Security and Medicare. Those safety nets notwithstanding, the last years of his life were very penurious...nothing like what he (reasonably) expected based on the fund he had worked to accrue for retirement.

[Noadi]

The only way I can you'd be saving too much is when you are saving more than you need at the expense of other things like paying off debt.

As for people not saving if their workplace doesn't offer it, that doesn't surprise me. I'm self employed and doing it all on my own is a little overwhelming (slowly learning, I never planned to start a business it just grew out of a hobby so I wasn't as prepared as I could have been). I can understand that intimidation aspect.

Of course you also have to consider that there is a large percentage of the population that saving for retirement isn't even on the radar. They're just trying to survive. I grew up poor, my parents weren't able to save for retirement they were more concerned with feeding us. They missed out a lot and started saving much later in life. I think they're well on the way to catching up now but a lot of people aren't that lucky.

[Beastlike]

FMF,

Where do you put your retirement, in one company?

I guess I was always under the assumption that our 401k's / Roth IRA's were backed by the government until I read the fine print. Isn't it a little risky investing your retirement in one or two firms like Vangaurd and Fidelity (for me). What's the safest way?

[FMF]

Beastlike --

I have some rollover funds with VG and my 401k with Fidelity. It's not risky because the underlying funds are safe even if the company itself goes under. Reference:

http://www.publicradio.org/columns/marketplace/gettingpersonal/2008/11/if_a_mutual_fund_company_fails.html

[Rick Francis@ponderingmoney]

>10% are "saving too much."

I can think of a whole lot of reasons why "too much" wouldn't really be too much... At the very least what if you wanted to leave something to your children or a favorit charity?

-Rick Francis

[Apex]

"Basically, I'm getting out of this that people don't have the motivation to save on their own"

People are herd animals. They don't have the motivation to do hardly anything responsible on their own unless their is some social herd force that drives them towards that behavior. There is as of yet no compelling herd behavior towards financial responsibility so why on earth would they venture outside the herd and do something they don't see others around them doing.

Observe human behavior for a while and notice how herd like it is. It's frightening when you realize what a huge intellect we have and yet how much we still act like a herd of buffalos being driven towards the cliff by the Native American buffalo hunter.

[Beastlike]

Wow - that's a relief! Thanks FMF!!

Although it's hard, I think most Americans need to be more self-reliant and not count on everyone else to take care of their every need (government, employers, etc.). My sister and brother have 3 to 6 years over my wife and I and we have our house nearly paid off as they are not even close. This is because we try not to buy anything we don't need (flat screen TV's, blueray, cable, text messaging, i-phones, etc) and they don't!

[billyjobob]

I'm with FMF and Crystal...no such thing as saving too much.. I mean unless the kids are going without shoe's, then there's no problem. I live well below my means and save all I can. I hope to retire @ 55.

[JimL]

Better to have too much than too little as you can always increase charitable giving as you near retirement. The past two years have shown us how the picture can change quickly, so I am building in some cushion in my projections.

[JoeTaxpayer]

I wrote to prof Laibson's admin to get a source on the 10% quote. There had to be a full lecture or article that yahoo and the others picked up, no? She replied that she didn't know and he was too busy to bother. Ok.

I'm working on my own post on this issue, but I'll share my major though here. Before the crash, you were retiring. You had 'too much'. 50% too much, in fact. Now where do you stand? Just right? The concept itself is a joke, as if one can plan to be dead on, ever.

[Mr. ToughMoneyLove]

People can save too much by pretending that Social Security won't be around for them. That can lead to poor retirement planning, either by over-saving and/or excessive risk taking. If your statement (that you make often) that you are not counting on receiving anything from Social Security is supposed to be retirement planning advice to others, it's bad advice. If this statement is intended to predict the demise of Social Security in the future, it reflects a fundamental misunderstanding of political reality.

For more information on how wrong assumptions and bad advice can lead to over-saving, I suggest you consult "Spend 'til the End" by Burns and Kotlikoff, which does a good job of explaining consumption smoothing and how it can apply to personal financial planning.

As for the statements that "there is no such thing as saving too much", let me ask you this: Why not save 95% of your income and live like a homeless person? Yes it's a facetious suggestion but it makes the point that there are lines to be drawn between undersaving and oversaving. Most people want to have a relatively stable standard of living without extreme peaks and valleys. Knowing where to draw those savings lines is part of the process.

[Sarah]

"Basically, I'm getting out of this that people don't have the motivation to save on their own. If their company doesn't force/encourage them to save, they don't do it."

It's more than that, as I'm sure you actually know, FMF. No savings program in the workplace = much more limited tax-advantaged vehicles for retirement savings. Without a 401(k) or equivalent, your choices are basically $5K pretax into a deductible IRA or $5K post-tax into a Roth IRA, as opposed to the $15.5K you can put in a 401(k).

This doesn't mean you can't save independently, of course, but you're missing out on about 2/3 of the government handout.

[FMF]

Sarah --

It's true that the tax advantages are limited in your example, but people can still save an unlimited amount in normal/regular accounts. Is the only way to save these days an option where the government provides some sort of tax incentive? Nope.

[PaulN]

FMF,

I have always found tax-advantaged savings enticing, and have been lucky to max out most years. However, I am currently rethinking this since I expect tax rates to increase in the future to pay for our growing deficit and continued entitlement programs. I think a prudent course is to have a mix of taxable & non-taxable retirement income.

[PaulN]

Also, if you currently are in a lower marginal tax bracket, it would usually be beneficial in the long run to save in a taxable account today rather than take distributions from a tax-deferred account (IRA or 401k) when those distributions will be taxed at least 10-15% higher than the tax savings at the time of your contribution.

[Sarah]

No, FMF, but I do think someone who's enjoying a government handout to encourage him to save (and employer-provided benefits to do so also, no? doesn't your employer do some matching?) probably should temper his criticism of people who don't enjoy the same handouts to do so. Of course it's easier to save when both the government and your employer are paying you to do so!

My example isn't some rare case, after all--it applies to most working people whose employers don't offer tax-advantaged accounts. (For complicated reasons, it applies to me for about the next year and a half. With taxes taken into consideration, I'm actually saving more this year than I did last year despite a big drop in income, but it's both annoying and a disadvantage not to have access to those options.)

[FMF]

Paul N --

Me too.

Sarah --

FYI -- I do both. I save in a 401k and in taxable accounts too. If I didn't have access to a 401k, I would still save (and save even more than I am now in taxable accounts.)

BTW, I don't get many of the tax breaks/advantages/deductions/credits that many do because of one exclusion or another. So I adjust and work out the best plan possible to manage my finances given the situation. IMO, everyone should do the same -- make the best of the cards they've been dealt -- even those with no access to tax-supported retirement. That's what I'm suggesting above that people should do with retirement savings.

[Crystal]

Mr. ToughMoneyLove,

I much rather plan for no Social Security and be pleasantly surprised than to plan for it and be disappointed and needy during my later years...the years that I am least likely able to get a job to supplement my planning mistakes of today.

How does it hurt a person to "over-save"? Other than your trite example of homelessness, you never actually stated why a person would be hurt by saving more than what is necessary.

Yet, you can hear/see/read thousands of examples of how it hurt a person to "under-save".

With so many unknowns, it is better to be prepared than to hope you saved just enough.

[LeanLifeCoach]

My Grandmother has lived off of less than $900 in SS for years. We estimate that she has routinely given half of this away to her church and those in need. She has sacrificed for others, is this wrong?

In the extreme, if someone wanted to save 95% of their income and live meager existence, in a free country, why shouldn't we let them? While you or I may not choose or want similar I would feel compelled to respect a person's choice to live their life in a manner they see fit.

Personally, I think we are missing the point. My Grandmother made a choice and still remained responsible for herself. She is not costing society (at least not yet) because of her decisions.

When a citizen fails to be responsible and then becomes a burden on society is the result of Americans not saving. Instead of debating the how's and why's we should seek to understand and then look at what can be done to mitigate this?

[VT]

Saving too much? Really? Apparently the author doesn't realize that life will change during retirement. Medical costs will go up; ill health or the death of a spouse may mean a move into assisted living ... having that extra money could mean a bit of comfort and more control over what happens at the end of your life.