People tell me that there is nothing quite like reaching a certain age when you know your financial future is secure. Those are the days when the weight of life is lifted off your shoulders, you wake up with a smile and your days schedule waits to be filled out. Long term planning is limited to your second cup of coffee.
We all know it can be done because 10,000 baby boomers are retiring about every day. Getting there is the challenge.
Today there is more help than ever. Between traditional financial planners and the bazillion websites offering advice, as well as TV news, there is no shortage of advice.
No matter what the source, it all starts with savings. There will always be advisors with great tax strategies that create tax differed income. Some will have three letter initials like IRA.
Where Good Advice and Reality Collide
All the best advice has to fit with reality. Any spreadsheet jockey can make assumptions about the cost of living 30 years from now and discount that to the present. Then you will know exactly how much to put aside every month for the next 360 months. Simple as that; don’t forget to include a 3% fee for this advice.
During the best year for savings in the last decade, Americans were able to put aside just 5% of their earnings. The average savings rate has been closer to 2%. How does this match up with the advise of financial industry pros? Let’s start with a look at reality.
Reality Doesn’t Look So Great
A report from the Economic Policy Institute using government data claims that the median savings for all working-age families is only $5000. There are a number of cities in America where this amount won’t pay the rent for a single month.
The EPI reports sends out some disturbing data. Since the year 2000 families over the age of about 40 have less savings today than at the turn of the century. The biggest drop is in the age group 56-61 where savings levels since the financial crisis have fallen 22%.
The behavior of this later group is accentuated by the lingering high unemployment. Older workers were particularly disadvantaged in finding new jobs. Obviously, the only option for many was to dip into savings.
Good Luck With This Bit of Advice
Advisors like Fidelity Investments are one of the leading and most highly respected organizations in the business. Here are some of their guides to financial independence that will enable you to retire by age 67.
Start saving 25% of your gross income. Now that is a great idea and one that we would all like to do. So if you take your gross income, deduct about 30% for taxes, another 30% for housing, 20% Food, 10%-15% for clothing you are left with 90%-95% of your income gone. This is before payment of things like student loans, credit cards etc. It is why most Americans find it impossible to meet the unrealistic guidelines from even the most respected organizations like Fidelity.
The most absurd premise of all is the recommendation that if you want to retire by 67 you need to have 10 times your final year of income in savings. So if your final year or working earned you just $50,000 (the national average for income) then you should have $500,000 socked away in savings. According to EPI, the average family between 56-61 was $163,577.
Authors of the study are wise to acknowledge that the mean number is distorting because US incomes are so skewed. For example, 93% of all US income taxes are paid by only 10% of the population.
So a more accurate gage of reality is median savings, which is the midpoint of all families 56-61. In this case, family savings amount to just $17,000.
So the next time someone explains exactly how easy it is to use their strategy to achieve nirvana, check them out through a psychiatrist. The only way to save more is to spend less and that is a tall order for most families. Maybe the best advice is how to squeeze 25% out of your paycheck for savings.