The Government Has A New Idea to Fix Retirement -- Here's What You Should Do Instead
We are all familiar with the statistics. Fifty-percent of Americans have virtually no retirement savings. We’re facing a $4 trillion retirement shortfall. Social Security isn’t fully funded for future workers. The retirement crisis is just around the corner.
Pretty grim, right? Fortunately, the best minds in U.S. government are on the case.
If that doesn't reassure you, you're not alone. Many of the retirement fixes floated by politicians and bureaucrats amount to little more than posturing. A band aid effort to give the impression “something is being done.”
The latest solution? An opt-out, automatic IRA program that would compel workers to save three-percent of their income. President Obama has given the plan his support, and the state of Illinois will begin its own version of the plan in 2017.
The plan would require businesses with more than 10 workers and no company retirement plan to automatically enroll employees in IRAs. If workers don’t want to save the three-percent, they must opt out of the plan.
Only about half of Americans have access to a retirement account via their employer. Given the recent explosion in contract employment, this number is likely to grow. The automatic IRA is an attempt to close this gap.
Now, this isn’t an entirely bad idea. Putting the onus on workers to opt out is smart. In fact, it’s a critical component. Research has shown that people with opt out plans save more than those with opt in plans. This is largely due to the human tendency toward inertia. Many people simply can’t be bothered to file paperwork.
Plans that exploit our innate tendencies for our own benefit are generally effective. If this plan is implemented, it could provide millions of people without retirement accounts with a new option.
Yet it won’t be enough.
While something is surely better than nothing, the fact is that three-percent just isn’t enough to make a difference. Not in terms of the broader retirement crisis. Not on an individual level, either.
The Employee Benefit Research Institute calculates that an automatic IRA program would only close that $4 trillion deficit by a mere six-percent. Sure, that’s progress. Yet ultimately it’s just more deck chair rearranging on the Retirement Titanic.
So what would work? What should you do, if you don’t have access to an employer account?
Here’s a hint – don’t wait for the government to solve the problem.
Instead, take matters into your own hands. Open an IRA – but make significant contributions. Three-percent isn’t enough to make a difference. Think ten-percent – or aim higher.
Does that sound unrealistic? It shouldn’t. Australia has a national version of the automatic IRA. Their compulsory rate? Nine-percent – and soon to be twelve-percent. And you can’t opt out.
Many Aussies were bitterly opposed when this plan came into effect in 1992. Yet a funny thing happened.
They learned they could live with less money.
In fact, when the plan was introduced, the contribution rate was only three-percent. As Aussies got used to saving more, the rate was gradually increased. Now one in five workers in that country chooses to save even more than the nine-percent minimum.
That’s how you build wealth. A comfortable retirement nest egg. It requires a little sacrifice at first. Yet you’ll soon discover how easily you’ll adapt.
And you don’t have to hope the government will solve our problems.