The idea of retiring at age 65 with a gold watch and a
fully-funded retirement account is a quaint notion for
many Americans. Amid stagnating real wages, rising
inflation and (still) low interest income, most people
have a tough time setting aside money for retirement.
And the truth is that there are multiple problems that
Americans face in saving for retirement.
While the 401k is still one of the best available
retirement saving options for many people, only 32%
of Americans are investing in one, according to the
U.S. Census Bureau. That is staggering given that
59% of employed Americans have access to one.
And of the ones who do, an even smaller percentage
are saving enough to live well in retirement. Consider
these numbers from How America Saves:
Average 401K balance
Median 401k balance
So, think these balances are sufficient to support your
lifestyle when you retire? Considering that the
average life expectancy for women is 86.5 years and
for men it is 84 years, probably not.
You really think that half of those people in the 55-64
age group can live another 20+ years on $3,500 a
Sobering thought #1: wage growth
One, the lack of real long-term wage growth in
America over the last decade affects our ability to
save for retirement.
It is true that in April 2020 – one of the worst months
during the pandemic when the U.S. economy lost 21
million jobs – we saw one of the fastest wage growth
periods of all time. You might remember that during
that month, the Bureau of Labor Statistics reported
that year-over-year growth in average hourly earnings
skyrocketed to about 8% -– the highest observed
wage growth rate since the series began in 2006.
But that massive increase was because more lower-paid workers lost their jobs while more higher-paid workers did not. As such, the “average wage” went
Look at it this way: If person A makes $20/hour,
person B makes $30/hour and person C makes
$40/hour, the “average wage” is $30. But if person A
loses their job, then the “average wage” jumps to
$35/hour – which is a 16.6% increase.
When changes in data are driven by a shift in
underlying characteristics – like more lower-paid workers losing their jobs – economists call
these “composition" effects.
Sobering thought #2: inflation
Factor inflation into this equation, and the wage
growth story collapses even further. And with less real
income, there is naturally less left over to save for the
Sobering thought #3: low interest rates
If low wage growth and rising inflation wasn’t bad
enough, think about how the Federal Reserves' “easy
money” policy hurts savers.
Just look at the Federal Funds rate over the past 70+
years (the Federal Funds rate is the interest rate at which
banks lend to other banks and is set by the Fed).
Currently, the Federal Funds rate is 0.10%.
We used to get a small but significant reward for
keeping money in savings accounts, certificates of
deposit and government bonds. That’s gone as
interest rates are close to zero. Without safe
investments like that, many investors flock into riskier
asset classes they know little about.
What can you do
The key to successful financial planning lies in
following wise investment strategies, custom tailored
to your personal aspirations. And while your financial
plan should be tied to your long–term goals, short–term events need to be addressed too.
Your financial advisor can help you keep your
emotions out of your investing decisions, properly
account for inflation, and make sure your asset
allocation is designed for income, growth or both.
More importantly, your financial advisor can help you
balance long–term strategies and short–term tactics to help ensure you are accounting for
That way you can rest comfortably at night knowing
that your money is working for you.
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