How well prepared are you to retire comfortably when you’re ready to stop working?
For too many Americans, the alarming answer is “I’m not at all prepared.”
That’s according to the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2014,” published in May and based upon household survey data compiled in October of last year.
That nationwide survey, now in its second year, found both good news and some worrisome trends in the financial outlook for Americans by looking at a range of measures related to housing, savings, spending, education, debt, credit and ability to deal with a financial emergency.
If you’re a working age American with hopes to retire one day, treat these survey results as a spur toward building your own investment plan. Let’s take a closer look at what the researchers found.
Americans’ retirement outlook by the numbers
Among the worrisome findings, the lack of retirement planning and preparation among many Americans looms large. Fully 39 percent of non-retired Americans surveyed said they “have given little or no thought to financial planning for retirement.” In addition, nearly one-third-31 percent-said they “have no retirement savings or pension.”
The lack of retirement preparedness is particularly acute among lower-income Americans. For respondents making less than $40,000 per year, only 42 percent report having any retirement savings, the study notes.
The survey asked employed respondents who do not participate in a work-related direct contribution plan (401(k) or similar), why they don’t participate. Among the responses:
- Forty-two percent said it was because their employer did not offer such a plan.
- Twenty-nine percent said they were unable to afford to contribute to their plan.
- Fifteen percent answered they were “unsure of [the] best way to invest money contributed to the retirement plan.”
- Four percent admit they “prefer to spend money rather than save.”
More than a third of all non-retired respondents say they “do not plan to retire” or will “keep working as long as possible.” For some this may be a choice-for others, it may be the unfortunately necessary result of the failure to plan.
Among those who do plan to retire, the report offers a glimpse of how many Americans today are forging a revised understanding of what happens after their peak working years. Rather than planning to simply withdraw fully from the workforce, many profess a desire to continue working, either at the same job, in their own business or in a part-time job.
Those findings would appear to suggest a more complex vision of “retirement” than what we may typically imagine. As Americans live longer, more are looking to keep working, or to take on late life careers, as a way to stay engaged and involved in their profession or community. That could be a positive trend.
But the key thing is that you want it to be your choice to keep working-not a forced decision that’s dictated by a failure to save and invest wisely during your peak earning years.
What can you do to be prepared for retirement?
So you’ve decided you don’t want to be one of those who hasn’t prepared for retirement. A good first step is finding out what kinds of plans are available to you.
Close to half of non-retired Americans (47 percent) hold their retirement savings through a “defined contribution” retirement plan like a 401(k) through their employer, the Fed survey found. About 22 percent participate in a “defined benefit” pension-type plan through their employer.
Some pundits lament the decline of the defined-benefit retirement plan, like an employer-provided pension, which guarantees lifetime income flows for workers after retirement. As the Fed survey indicates, such plans have been eclipsed by the rise of defined-contribution plans (described by the researchers as a type of “self-directed retirement accounts”), which accumulate over time based upon employee contributions, matching contributions from employers and investment returns.
Unlike pensions, defined-contribution plans are portable, so they travel with you if you change jobs or careers. That describes the experience of most Americans today-far fewer of us stick with one job for our entire life.
Having greater control over one’s retirement savings, and the flexibility to take those savings with you as you move through your career, is a significant benefit-but only if workers take advantage of the opportunity.
That means that if your employer provides a retirement savings option that you’re not participating in, consider enrolling at your first opportunity. For the self-employed or those who lack access to an employer sponsored plan, check out any of the various types of Individual Retirement Accounts (IRA) that allow you to save while providing some tax advantages, and is a common option among non-retired savers (29 percent).
Project Invested has covered the importance of retirement planning previously, and those lessons are worth reviewing. Most importantly, the results of the Fed study make a few points very clear:
√ Time is on your side. The survey results indicate that younger workers are among those least focused on retirement. But with their longer horizon for earning and investing, they should be focusing on developing a plan now, so they can realize the gains of long-term compounding in their retirement accounts.
√ Get professional help. One of the most arresting findings of the Fed survey is that even those who have been diligently preparing for retirement express misgivings about their ability to manage their investment-51 percent admit of those with self directed retirement account (IRA or 401(k), or the like) that they are “not confident” or only “slightly confident” about managing their retirement accounts. If you’re not confident, it’s a good idea to consult with an investment professional who can help you make a plan for your retirements savings and investments. Don’t let a perceived lack of confidence or knowledge keep you from getting started.
√ Just get started. Perhaps the most important lesson is to get started saving and investing for retirement, because even modest amounts can create momentum. That means it’s time to assess your spending and saving habits, check out what retirement options are available to you, and start investing now-and commit to building a nest egg for your future.
If you’re already saving for retirement, that’s great news. If not, then it’s a good idea to view the results of this Fed survey as a wake up call that it’s time to start making your retirement future a reality.