How to Avoid the Looming Retirement Armageddon


Here's a depressing number. A 2013 survey conducted by the Federal Reserve estimated that more than one-third of Americans aren't saving for retirement.

Not-five percent. Not two-percent. Not even one-percent.


Wait a minute, you might object. Most of those non-savers are probably young workers. They have plenty of time to see the light.

If only that were so. It's true that half of all workers 18-29 have no savings. Yet the numbers are still troubling for older Americans. Nearly one-quarter of workers aged 45-59 have saved nothing.

That's a sobering number. At that age, our options begin to narrow. We put ourselves at the mercy of larger and unpredictable forces.

Some of us have a misguided view that the government will take care of things. A quick look at federal financial projections should quash that notion.

Some of us have a mistaken belief we can’t afford to save. That's almost never the case. There's always fat to be trimmed.

The bottom line?

Millions of Americans are perched on the edge of a financial abyss. It's a crisis of our own making.

It won't just affect them. The broader economy will suffer a hit. Millions of retirement-age people will radically slash consumption. They will rely on family and friends. These loved ones will be deprived of their own savings and purchasing power.

It's a recipe for retirement Armageddon.

So how do you avoid becoming a casualty of this looming catastrophe?

Education -- and immediate action.

Sidestepping the retirement crisis

These days, for better or worse, retirement is your responsibility. Don't make the right decisions today? Then you'll spend your most vulnerable years operating without a safety net.

There are some classic calculations to help you assess whether your retirement savings is on track. The 80-percent income replacement rule is one yardstick. It assumes you'll need to replace 80-percent of income in retirement.

Another common measurement is the eleven times rule. This yardstick says you'll need to save 11 times your salary. If you earn $100,000 at retirement, you'll need a nest egg of at least $1.1 million.

Such metrics are broadly useful. Yet we believe they are too conservative. Eighty percent of income sounds impressive. Yet we tend to underestimate how much we'll spend when retired.

Think of it this way. Do you spend more money during the week or on the weekend?

During retirement, every day is Saturday.

Numbers don’t lie

It's generally accepted that half of us don't save enough for retirement. The decline of the traditional pension system left many workers exposed. The 401k is valuable for workers who have access to it. Yet they were never designed as a large-scale pension replacement.

There is another option available to seriously jumpstart your savings – the Individual Retirement Account (IRA). Yet many workers are unaware of its value. That's one reason so many Americans are facing an uncertain retirement.

The IRA is one of the most powerful wealth building tools available. Unfortunately, far too few of us take advantage. A recent survey by TIAA-CREF shows that only 18-percent of Americans have an IRA as part of their retirement strategy.

The survey offers some eye-opening data about the public perceptions of IRAs. Twenty four percent of respondents said short term saving is a priority. That means saving for things such as appliances or vacation. A mere eight-percent said opening an IRA is a priority.

That kind of thinking cripples your ability to execute a wealth building plan.

The survey isn't all bad news. It showed that 56-percent of Americans are interested in adding an IRA to their retirement plan. That's an increase of nine percent in just one year.

A great tool -- if you use it

So what explains the gap? Education and awareness. The survey also showed that 43-percent of people surveyed couldn't even define an IRA. Meanwhile, 39-percent of those without an IRA said they didn't feel educated enough to open one.

That's troubling. Basic financial literacy eludes far too many of us.

Awareness of the power of IRAs corresponds with income and education level. The TIAA-CREF survey showed that 81-percent of Americans earning more than $100,000 were IRA savvy. That percentage drops to 42 for Americans earning $35,000.

College graduates contribute to an IRA at a rate of 28-percent. Those without college degrees have a rate of just 18-percent.

This is stark data. It shows that people who would most benefit from an IRA don't have them.

The numbers for young people are also grim. Among the 18-34 age group, 54-percent could not define an IRA. A mere six-percent said an IRA is a savings priority.

Confusion about IRAs is understandable. There are several types of accounts. There are a variety of rules to understand. Yet the basic idea is easily grasped. By putting money into an IRA today, you acquire valuable tax advantages. You build a durable nest egg for the future.

You avoid falling into the retirement abyss.

Not that long ago, the utility of IRAs was limited by strict caps. In 2015 the annual contribution cap has risen to $5,500. That makes IRAs more appealing than ever.

Whether it's a traditional IRA, a Roth or a rollover, there's no better tool for avoiding the looming retirement crisis.

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