Retirement Then vs. Retirement Now
By Rick Ramos
Most of us dream of a retirement of travel, relaxation and nothing but free-time. But, if you’re in that majority are you in the minority of those actually saving for your golden years? Only about 30% of Americans are actively saving for life after 65 and only about 25% are confident of their ability to afford it. The scariest statistic of all? Almost half of the workforce have no retirement plan in place at all.
Some of the statements I have heard in my meetings with clients about their retirement: our budget is too tight, we are going to start next year, I am not worried about it right now. The list goes on and on but the thing I find when I probe a little deeper is fairly simple: People are afraid. They are afraid of what they are not doing, they are afraid of the costs but mostly they are afraid of the unknown. Americans simply don’t know how they are going to retire.
Take a look at what has changed in the workplace. Two generations ago the average retirement age was between 60 and 65. People worked, retired and then began the golden years and lived to 70 or 75. One could reasonably work for about 40 years and retire for 10 to 15. At retirement the company you worked for most of your life gave you a pension. The government took care of the rest with social security.
Now, fast forward to the present. Most people change careers an average of four times. The modern economy of buyouts and constant advances in technology make working for one company unrealistic. Pensions have been frozen, rolled into different plans or simply eliminated. People want to work until age 50 or 55 but now can feasibly live well into their eighties or even nineties. To top it all off there is the very real possibility that social security as we know it could be gone or radically changed by the time you reach retirement. You now have a generation that is faced with the possibility of being retired longer than they worked and with less security to get them through!!!
If that isn’t enough consider a few things. In my experience my clients’ above average home costs approximately $275,000. The cost for college is currently about $120,000 per child for a decent four-year school. The average retirement needed to fund a comfortable lifestyle? That number is between 1 and 2.5 million. Even if pensions and social security were anticipated to be intact they would only fund a portion of what the average (yes I said average) American wants to retire on.
There is no hope is there? Of course there is but you have to make retirement a priority and utilize the tools necessary to make sure you can retire. But, the way you can do that is very simple. Realize the power of saving early and then combine it with the power of compound interest. Yes, pensions are numbering fewer and fewer but they have been replaced by the 401(k), 403(b), 457, Traditional IRA, Roth IRA, variable and indexed annuities and the list goes on and on. What do all these things mean? Well depending on who your employer is and how educated you are about these vehicles you probably have one or even several different accounts in your household.
The reason pensions and social security are in their current state comes down to the basic principle of money. They have simply become too expensive for one entity (a company or the government) to assume all the administrative costs as well as the risk. Plans like the 401(k) are designed to minimize risk to the company by putting the onus on you, the employee, to choose which investment to place your money. The problem is two-fold: people are not saving enough and most people have no idea where to invest. It is simply not enough to set aside 2% of your income (the national average) and yet most people are aware that they should be saving at least 10%. You also cannot continue to look over the shoulder of the person in the cubicle next to you as they build their portfolio. How many people ask their brother-in-law the plumber what mutual funds he has? Does the manager of customer service really have a handle on what bond fund is best in the company retirement plan? Do you really believe that the issue of Money Magazine that you buy once a year holds the answer to all your questions?
The average investor in this country gets less than a 3% return on their investments. Yet, the stock market has averaged over 10% for any ten-year block of time for the last 75 years. In order to understand how to best leverage assets today so you can live comfortably tomorrow takes a couple of steps. The first is to do an honest analysis of your cash-flow to figure out what you live on and what you can save. The second, is to then use those savings and get them working for you in the best way.
There are two ways to make money: you can work to make money or you can have your money make money. We all know how to work but we don’t know how to make our money work. Fortunately, there are a lot of educational tools and resources available. Most people don’t realize that if their company offers a 401(k) or similar account they can contact the custodian of that plan for investment advice. Many providers like Fidelity, Vanguard, and American Funds have a phone support and even web-based assistance. There is also an abundance of financial professionals that are affiliated with banks, insurance companies and investment firms. This is often a great option when someone wants an objective look at their overall picture. They have the tools and expertise to assist you with a cash-flow analysis and help with your retirement goals. Many will even give you an initial consultation at no charge. There are also hundreds of websites with information about the different vehicles and ways to save.
Ultimately, the decision to take a hard look at retirement must be one of commitment. Many want to do it but wait far too long. When faced with a procrastinating attitude I always respond by saying: You can borrow the mortgage on your house, you can borrow money and apply for scholarships for your child’s education but you cannot borrow your retirement. Take action to get your retirement picture clearer sooner rather than later. A thorough analysis at worst will give you a solid place to start.
Rick Ramos is a financial professional and registered representative. His licensing includes the selling of securities. He also carries a certificate in continuing education for retirement planning in the state of Illinois.
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