Alarming studies have shown that a significant percentage of future retirees are not planning for retirement and will not have sufficient income to maintain a decent standard of living as they age.
A Fidelity study found that 82 percent of Americans don't have a retirement plan. Almost half of older Americans have no money saved in retirement accounts, according to the U.S. Government Accountability Office.
A 2018 retirement savings survey from GOBankingRates found that 42 percent of Americans have less than $10,000 saved. On average, adults 65 and older spend almost $46,000 a year, according to the Bureau of Labor Statistics, so many future retirees will come up short.
The majority of workers in corporate America no longer have a defined-benefit pension plan. Employers for years have been phasing out these pensions in favor of 401(k) plans, which put the burden primarily on employees to contribute to these plans.
Unfortunately, many employees either choose not to contribute to a 401(k) or they contribute too little in order to receive the maximum corporate match.
There are other reasons why future retirees will find it difficult to maintain their standard of living in retirement. The Social Security trust fund will face shortfalls by 2035, according to current government estimates. There will be fewer workers paying into Social Security and more people retiring and claiming benefits.
Congress will be forced either to reduce benefits or to raise taxes; either alternative will make it difficult for future retirees.
Although the unemployment rate is low, many are working part time and accordingly are not earning maximum credits for retirement. In addition, wages for many workers have not kept pace with inflation, making it difficult to contribute toward their retirement.
A common mistake among those who are contributing to their retirement plans is that they are being too conservative in their selection of investment alternatives. Because the stock market has been volatile recently, many retirement savers have reduced their allocation of common stock investments.
From a long-term perspective, this is a mistake.
The average annual stock market return over the long term has been 10 percent, 7 percent after adjusting for inflation. Returns for other forms of investment have been much lower.
Accordingly, those who are concerned about growth in their portfolios, especially those who are 10 years or more away from retirement, should have a significant portion of their assets invested in common stocks.
I believe most investors should be using diversified index funds with low annual fees.
Another mistake is not making regular contributions to retirement accounts. Investors with IRAs, 401(k)s and other retirement accounts have the benefit of tax-deferred growth. From a long-term perspective, regular investment in retirement accounts is more beneficial than nonrecurring investments in non-retirement accounts.
Too many people also fail to take advantage of health savings accounts. To be eligible for an HSA, you must be covered by high-deductible health insurance, and many Americans are.
HSAs have many tax advantages. Contributions are tax-deductible, and earnings are tax-deferred. In addition, you are not required to withdraw funds in your HSA each year. You can roll the funds over from year to year, continuing your tax deferral. Even in retirement, you can maintain your tax deferral without penalty as long as you use the funds for medical expenses.
There are other opportunities to retirement savers that are not used enough, including contributions to retirement accounts for non-working spouses. Employees over 50 also can make extra contributions to their IRAs, 401(k)s and other retirement accounts.
Most people who wait until their 50s or later to establish a retirement plan will find that they don't have sufficient time to save enough to ensure a comfortable retirement
Many employers don't want to retain their employees until age 65, even if the employees wish to continue working until retirement. Employees should recognize that they may be forced to take early retirement.
Employees who are forced to take early retirement and want to continue to work may find that the employment opportunities are not appealing and require salary reductions and unimpressive benefits.
Establish a retirement plan now, look for ways to reduce your spending and make regular contributions to your retirement accounts.