April 3, 2013
More than a quarter of women earning $200,000 or more are afraid they are going to end up as bag ladies, and about half of women with paychecks around $100,000 fear the same fate.
Among all Americans, a mere 13 percent are very confident they are going to have the money they will need some day for retirement. Only 38 percent of Americans are even "somewhat confident" they will be OK, according to a survey by the Employee Benefit Research Institute.
This is the ugliest view Americans have had of their futures since the institute started asking Americans two decades ago how confident they were about getting to retirement with enough money.
The hideous numbers are partly a reflection of the shock people have lived through the last few years. After all, it's difficult not to feel fragile when millions have seen their jobs blow up and realized their home values were a fantasy. It's difficult to expect you'll be ready for retirement when 401(k)s have been sliced in half twice in a single decade.
"Women run scenarios through their heads, and they can see the world come crushing down on them," said Katie Libbe, vice president of consumer insight for Allianz Life, the firm that discovered the widespread bag lady mentality in a recent U.S. survey.
But apart from the fearsome lessons delivered by the 2008 financial crisis and the Great Recession, the numbers identified in many studies of retirement savings lately are not vastly different from those in the past. Although Americans suspect they are worse off, they have known for years that they haven't been saving enough for retirement. What they learned the last few years, however, is that expecting a magic wand to put money into their 401(k)s and individual retirement accounts is probably delusional.
In the '90s, benefits firm Towers Perrin asked people who were within 10 years of retiring and had saved nothing to describe the retirement they expected to live. Almost half described a retirement of vacations and luxuries.
The Great Recession popped that belief. But as that dream burst, it's possible that a troubling reality has set in. People feel overwhelmed by the task of saving adequately. Yet they may be imagining a task more difficult than the actual one they face.
When asked what they would need to save for a financially secure retirement, about 20 percent said they'd have to save 20 to 29 percent of their income, said Jack Vanderhei, a researcher at the Employee Benefit Research Institute. Nearly a quarter indicated they'd need to save 30 percent or more.
The desperation is tragic. People have always had more control over their future than they imagine.
A few years ago, the Employee Benefit Research Institute surveyed Americans and asked if they could save $20 a week or $20 more a week. Most said they could, but they didn't think $20 a week would matter. Yet, if people at the beginning of their careers were to start saving about $20 a week in a simple mutual fund that would invest in the stock market — or a Standard & Poor's 500 index fund — and increase the amount using half of every raise, they would likely have close to $1 million at retirement.
Put another way, a 20-something who is lucky enough to work at a job with an employer who gives free matching money can plop 7 percent of pay into a 401(k). Assuming an additional 3 percent employer contribution, and provided the money is invested wisely, the person should end up fine at retirement.
The task of saving does get worse if the person misses those early years, but it's probably not as bad as people think. Those who wait until their 30s need to save about 15 percent of pay, or less if their employer gives free matching money, according to Charles Farrell, author of "Your Money Ratios."
Those who wait until their 40s do face a hard reality — saving about 20 percent of pay. But before despairing, realize that even inching the money up a little at a time is better than skipping it altogether. If a 50-year-old has $100,000 in retirement savings but is saving nothing while sending kids to college, he or she may still accumulate close to $500,000 if he channels all the college money into retirement after the children graduate.
Of course, if there is another awful downturn in the stock market, money will be lost again. But for those worried about living as bag ladies, there is a reassuring side to the 2008-09 crash. Although a person would have lost about 29 percent if they had invested in a balanced mutual fund with 60 percent in stocks and 40 percent in bonds, they could have recovered within about two years and be way ahead now.
But how are people actually doing with their savings? Not good. Anthony Webb, economist for the Center for Retirement Research, says half of people ages 55 to 64 years old with 401(k)s or IRAs have $120,000 or less saved for retirement. That means they will have only about $400 a month to live on in retirement, or about $1,600 with Social Security benefits.
That's not a pretty picture. But by delaying retirement until 70, Webb said, you increase your Social Security benefits by 76 percent and avoid dipping into your nest egg until later. A person who would have earned just $750 a month from Social Security at age 62 would have $1,320 a month if they start taking Social Security at 70, Webb said.
If those close to retirement work until they're 68 or 70, about 4 in 5 should be OK, he said.
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