American families do not save enough

According to a 2018 report from the Pew Research Center, 52% of American households were considered middle-class. The median income of middle-class households was $78,442 in 2016.  Most of these families are fully capable of living comfortable lives. Thanks to credit cards and loans, they can make large or numerous purchases today, and pay for them as they earn their steady income.

If we need a car, we usually don’t have to save enough money to pay for it; we get a loan with monthly payments which, hopefully, are within our means.

Although, most families also recognize the need to save for the proverbial “rainy day”, we have a “live for today” mentality.  Pressing, current “needs” and desires seem more important than future financial needs. These same desires constantly tempt us to spend what we have not yet earned.  Our parents and grandparents focused more on saving, whether in banks or stuffing the mattress; wealth was based on what they had put away.  Today, wealth is primarily measured by material possessions: nice houses and cars, fancy purses, shoes, jewelry, furniture, to name a few.

Just to put things in perspective, Bankrate’s March Financial Security Index survey, conducted by SSRS, who interviewed 1,003 respondents via telephone, stated that more than 1 in 5 working Americans aren’t saving any money for retirement, emergencies or other financial goals. According to this survey, 48% of Americans are only saving up to 10% of their income, while 21% are not saving anything at all.  

Common reasons why common savings plans fail:

• Low income – many families are living paycheck to paycheck, making purchases with credit cards
• Little things add up to become high expenses – going out to eat is the highest expense among today’s business professionals
• Low savings goals or no goals at all – savings in 401k are great, but alone, they are not enough to provide a comfortable retirement
• Inability to delay gratification – this is self-explanatory, and can range from electronics, to fancy restaurants, vacations or other unreasonable spending

Expenses – the main reason we don’t save more money

Modern families tend to live well above their means. Their expenses usually exceed their incomes. This can be the result of poor budgeting and purchasing habits, or a diminution in income. Whatever the reason, they save minimally and make frequent withdrawals from savings. Pledges to replace the money are rarely honored because there never seems to be anything extra to put away. So how can 10% saved, support our quality of life if the income stream dries up?

On the other hand, as incomes and credit limits increase, so do expenses. Ask anyone who makes over $100k per year, if their savings have grown drastically since their income grew.  Most will say that only their expenses grew.  A friend recently got a great job at a law firm, and her income more than doubled.  Her words stick in my mind: “I love my car, but I have to buy a new one; a successful attorney isn’t supposed to drive a 10-year old Saab”.  Unfortunately, this type of pressure is all around us, and our children. Kids get bullied over clothing, sneakers, and even reusing last year’s backpack. As, parents, we have to figure out how to save on everyday expenses, while also focusing on how to keep our kids from being a target for bullying. 

With all these excuses not to save, it becomes easy to put it off. Unfortunately, in the worst case scenario: our death, all the expenses and material wealth will be worth nothing for the family that lives on. 

Life insurance is an essential part of any savings plan.

By definition, cash value life insurance is the ideal method of saving money, with a guarantee face value is available for a family’s needs after the breadwinner’s death. A death benefit is guaranteed at the policy’s full face-value from the outset. Even if the policy owner pays only one premium, the plan is fulfilled the moment he or she dies. This means, the policy provides inheritance and income tax-free cash proceeds that can be converted into a regular income stream. Life insurance also creates liquidity and an immediate estate for the payment of final expenses, taxes, and any debt. It provides funds for education, emergencies, and the survivor’s retirement. 

In addition to death benefits, Cash Value from insurance provides living benefits. When a person or family needs money for emergencies or to pursue opportunities (business or education for a better career, etc.); it provides collateral for guaranteed policy loans and withdrawals. Upon retirement, the policy-owner can use this cash value to supplement retirement income and other financial needs.

Why I need to save more money

As I write this article, I try to be very objective, but being a mother of two little boys, I am incapable of being unbiased. I do not have enough saved for their future, but hopefully I still have time.

I hope and pray that I still have the time, but I don’t know anything for sure about the future, except that death is inevitable. 

No one wants to think about death, or prepare for it, especially at a young age.  We want to think about how to reach our goals, or provide for our family today and in the future.  It is not easy to think about the future without us in it.  In fact, it is heart breaking, especially if we have children.  I worry about lots of things: not providing enough for them to live comfortably when I’m gone, is in the top 3.

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How much is Enough?

How much is enough to live the life you want during retirement?  A good question to ask yourself at any age, but difficult to know early in life.  If you have spent the last ten, twenty or thirty years working full time, you may think that your retirement savings are well ahead of what you may actually need.  

According to Penny Hoarder, only “27.5% of people ages 21 to 34 have a retirement account” If you save $100 each month starting at age 25, and your retirement account grows by 5% each year, you will have nearly $172,000 by the time you are 67, but if you wait another 10 years, then you will only save just under $95,000.  By the time you are 50, you should save at least six year’ worth of your salary. 

That being said, f you have not started saving for retirement, call us to open an account policy.  In 2019, the maximum annual IRA contribution is $6,000 for people under 50; it’s $7,000 for people 50 and up. If you start contributing $6,000 a year at 37, and your account grows by 3.25% annually, you will have $307,000 by the time you’re 67. Also if you have enough to make additional contributions that exceed the annual maximum or an IRA and Roth IRA, our, tax-deferred, annuities have the same interest rate structure.   

Experts generally agree that we need at least 70% of our pre-retirement income to live comfortably during retirement. Of course, everyone has a definition of comfort, so 70% may not be enough – or, in some relatively rare cases, it may be more than enough. However, it is clear that any retirement savings plan must begin with us asking ourselves: “What do I want to do with the rest of my life?”  This vision, this dream, should then fuel our efforts to save enough.

Retirement Dreams

In this article, we offer a few scenarios with estimates to give you a better idea of how much you need when the time comes.  In each case, individually tailored savings plans are important. Providence can help you design an appropriate plan based on your current situation as well as your idea of the retirement dream. 

The scenarios presented assume that the couple has a pre-retirement income of $80,000, expects a pension of $28,000 annually and will spend all its retirement savings during their lifetimes. Obviously, if they want to do more, such as helping grandchildren with college or leaving a legacy, they will need to save more. The figures also assume a 6% rate of return on investments and a 3% inflation rate.

The Homebodies

This couple views retirement as a time when they can relax and enjoy each others’ company. They will work in the garden, do charitable work and read good books. The mortgage will be paid off and the kids will be out of college. No plans of any extra expenses as far as travel or purchasing fancy cars or boats. 

• How much is enough: 70% of their pre-retirement income, or $56,000 annually.
• Savings needed with pension: $432,000 for $28,000 annually
• Savings needed without pension: $864,000 for $56,000 annually

The Snowbirds

This couple is much like the homebodies, and view retirement as one long vacation. However, rather than stay at home, they spend their winters in the Sunbelt. Whether they purchase a condo, or rent, their retirement will have to be higher than the 70% mentioned above. 

• How much is enough: 90% of income, or $72,000 annually.
• Savings needed with pension: $679,000 for $44,000 annually
• Savings needed without pension: $1.1 million for $72,000 annually

The Globetrotters 

This couple sees retirement as the beginning of a bold new chapter in their lives. They plan to travel the world – all of it: Argentina in Spring; The Alps in summer; Tuscan and the Riviera in Fall; and Bali in Winter. Oddly enough this hectic schedule requires earnings greater than those enjoyed in pre-retirement years. 

• How much is enough: 110% of income, or $88,000 annually.
• Savings needed with pension: $926,000 for $60,000 annually
• Savings needed without pension: $1.36 million for $88,000 annually

The Part-Timers 

This is the couple who finds joy in their job; it gives them a sense of purpose. They would feel lost not doing what they love so they plan on working twenty hours per week, thereby earning some additional income in the process.

• How much is enough: 50% of income, or $40,000 annually.
• Savings needed with pension: $185,000 for $12,000 annually
• Savings needed without pension: $617,000 for $40,000 annually

Reality – Life is Expensive

Now lets look at reality, life is expensive. You may fit the Homebodies category, but there are things that you want to possess to be comfortable.  For example a nice pool, or a vacation home on the beach for your grandchildren to visit during the summer. Or maybe you may want to sponsor a family vacation to a nice resort in the Poconos. You may want to donate to churches or charities. You may even like fancy clothes, purses, TVs or computers.  Just because you are retired does not mean that you should not be able to buy yourself some toys. There is also the possibility that you want to be a Homebody now, but when you get to retirement, your dream may change. So in reality, you will need to save more than the above amounts to have a little extra wiggle room.  

Retirement Expenses

The above calculations do not take into account some major expenses that you may encounter in retirement, including healthcare costs, existing debt, and taxes.  According to an article in the Motley Fool, “retirement healthcare costs range from $285,000 to over $363,000 for a 65-year old couple retiring in 2019.”  Also, taxes do not go away during retirement. Unless you saved exclusively in Roth Accounts, for instance, you will be taxed by that year’s tax brackets on amounts you withdraw from your retirement accounts. Taxes will also be due on your pension, property, investment, dividend and other income. 

It is absolutely possible to reach your retirement goals if you start investing your extra income today.  Although there are many investment opportunities, an IRA, Roth IRA or annuity are guaranteed forms of retirement saving that bear no risk. So even if you decide to be a bit risky with your investments, it is a good idea to place a significant portion of your retirement savings into these plans.  This way, no matter what happens with the stock market, you will still have enough to live your retirement dream.

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