6 Reasons Retirement Saving Fails (And What to Do About It)

Low retirement savings rates are to blame for chronically inadequate retirement balances. See some underlying causes for these low savings rates and what to do about them.
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By Richard Barrington

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Retirement savings rates in the U.S. continue to lag what it takes to fully prepare for retirement. Understanding why retirement savings rates are so low and what to do about them could help you avoid the trap of under-saving for retirement.

Majority of retirement savers not financially prepared

The Employee Benefit Research Institute (EBRI) released its 2017 Retirement Confidence Survey. While most Americans are saving for retirement, the survey showed those savings are not nearly up to the job. About 47 percent of survey respondents have less than $25,000 in retirement savings.

Retirement preparedness is not just about how much money you have – it also involves having a plan. Tellingly, less than half of those surveyed have even calculated how much money they will need in retirement. Without any sort of rational target, is it any surprise that retirement saving so often comes up short?

6 reasons people fail at saving for retirement

Since the U.S. retirement system puts a great deal of responsibility on individual workers not just to save and invest responsibly, but to come up with a retirement plan in the first place.

Here are six reasons why retirement saving fails:

1. Savers underestimate inflation

Inflation in recent decades has been pretty subtle. It’s been a long time since the double-digit price increases of the 1970s and early 1980s. Still, when it comes to retirement planning, you have to account even for low inflation rates. The reason they remain important to retirement planning is the amount of time involved.

Projected over the course of your lifespan, even a moderate inflation rate could cut the purchasing power of your money in half by the time you retire, and in half again by the time you die. It is essential that you use a retirement savings calculator that accounts for inflation in your retirement planning, and recognize that the yearly amount you need is likely to rise over time.

2. Over-reliance on Social Security

The thing to understand about Social Security is that it is better suited as a supplement to retirement income rather than as a primary source of that income. You can get a projection of your benefits from the Social Security Administration, and this is a good starting point for retirement planning. It will tell you how much you will need to fill in from other sources to meet your income needs.

3. Failure to calculate living expenses

Speaking of income needs, you really have to think through your future life style to figure this out. It also matters a great deal whether you own your own home and whether you will carry any debt into retirement. Don’t just rely on a rule of thumb based on percentage of income because there is often a disconnect between what people earn and what they spend.

4. The lure of early retirement

Having a retirement savings plan only works if you stick with it, but the reality is that a large number of Americans retire early. The EBRI survey found that 46 percent of current retirees retired earlier than they expected. Early retirement, whether voluntary or forced, can mean both lower savings and more years of retirement expenses to fund.

5. Understated longevity expectations

Average life expectancy figures are skewed downward by people who die unnaturally young due to accident or illness. However, if you make it to retirement age in good health, you can expect to live well beyond the average lifespan. The Social Security Administration has a Life Expectancy Calculator you can use to figure you how long you are likely to live based on your current circumstances.

6. The illusion of wealth

With diligent savings over the course of a career, retirement balances can start to add up to a pretty hefty sum. You might even find yourself becoming a millionaire eventually, but don’t get carried away. Spread those savings out over many years of retirement, and you will find that what looks great as a lump sum translates to a much more modest annual income.

The above points just cover planning issues. Sub-par investment returns, from near-zero bank rates to meager stock gains, have added another degree of difficulty in recent years.

Retirement saving is not a pleasant task. It involves a lot of detail work, not to mention the sacrifice of actually putting aside the money. However, sooner or later, you will have to come up with a plan. The key is the longer before retirement you come up with that plan, the more options you’ll have for making it work.

Frequently Asked Questions

Q: I am 60 years old, and plan to retire at age 62. Because Social Security won’t be enough to live on, I am continuing to put money into a 401(k) for extra income. Can you recommend an investment product for me?

A: Naturally, you should start with income-producing products, since you are looking for something to supplement the annual income you will get from Social Security. As you start to look into the possibilities more closely, what you find should indicate whether you can afford a more diversified approach than one devoted to income production – and this process might even affect your retirement plans.

Low-risk investment options

Every 401(k) retirement savings plan offers a menu of investment options that represents a range of risk levels, and you should be focusing on the portion of your plan’s menu dedicated to income-producing vehicles. Some of these are likely to be stable-value vehicles. Though as with savings accounts and other conservative investments these days, the main drawback of stable-value options is an extremely low income yield.

Bonds for a higher source of income

A higher-yielding source of income should be bonds. Your 401(k) likely has long-term bond options, and these should be offering a higher income yield than the stable value options. Just be advised that both the price and the yield of bond funds are variable, so you will be subject to market fluctuations. You can mitigate this risk somewhat over the long-term by choosing a fund dedicated to high-quality bonds only.

If you find a bond fund that produces enough income to meet your projected needs, you might consider putting any excess 401(k) balance into a stock fund, to give you some element of inflation protection. Retirement is likely to be just the beginning of a long period in which you will be living off your investments. This means some inflation protection for the long run would not be out of place, if you can afford it after you have taken care of your income needs.

Use time to your advantage for retirement savings

Choosing an investment vehicle could be an instructive exercise, not just for the present but for the future. Looking at how much income current yields would provide will allow you to gauge the extent to which your current 401(k) balance is sufficient to meet your income needs.

Why delay retirement to boost retirement income

If it is not sufficient, you might want to consider delaying retirement long enough to build more savings and increase your Social Security benefit. That may not be what you want to hear, but if you you don’t feel physically or mentally ready to continue working past the age of 62, at least consider downshifting to part-time work. Even that may be sufficient to buy you enough time to improve your retirement income.

In summary, income investments should be a central part of the answer if you are looking to supplement Social Security income. Just how much of your 401(k) should be devoted to income investments, and how soon you should access it, depend on the extent to which your income needs would be met by current yields.

More from MoneyRates.com:

Small salary? Here’s how to save for retirement

Over 40 with no retirement savings? Take these 6 steps

Do retirement planning tools do more harm than good?

About Author
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Richard Barrington
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).