January 3, 2013
This article was originally posted on Squared Away on October 23.
A large majority of people in a survey released last week identified saving for retirement as their top financial priority. If that’s the case, then why aren’t Americans saving enough?
Stuart Ritter, senior financial planner for T. Rowe Price, the mutual fund company that conducted the survey, has some theories about that. Squared Away is also interested in what readers have to say and encourages comments in the space provided at the end of this article.
But first the survey: about 72 percent of Americans identified saving for retirement as “their top financial goal,” with 42 percent saying that a contribution of at least 15 percent of their pay is “ideal.”
Yet 68 percent said they are saving 10 percent or less, which Ritter called “not very much.” The average contribution is about 8 percent of pay, according to Fidelity Investments, which tracks client contributions to the 401(k)s it manages.
The Internal Revenue Service last week increased the limit on contributions to 401(k) and 403(b) retirement plans from $17,000 to $17,500. The so-called “catch-up” contribution available to people who are age 50 or over remains unchanged at $5,500.
The question is: why do Americans give short shrift to their 401(k)s, even as people become increasingly aware that their dependence on them for retirement income grows? Ritter offered a few theories in a telephone interview last week:
- The financial industry is partially to blame. “We have done a really good job of conveying to people how important saving for retirement is,” he said, “but what we haven’t done as good a job of is telling them how much to save.”
Employers may also share blame. Further confusing the issue, the savings rate depends on when the employee starts saving – the percent of pay is lower for those who start in their 20s than for someone who waits until they’re 45.
- People are simply too busy to deal with what is a complex – even vexing – issue. “As human beings,” Ritter said, “we have a whole list of things we want to do but haven’t gotten to it yet.”
- He also cited behavioral economics research, which has shown that employers unfortunately send the message to their workers that, say, 3 percent is sufficient, because that’s the contribution required to be eligible for the employer’s match contribution.
There’s another obvious reason Americans are not prepared for retirement. The Great Recession and unemployment have put an enormous dent in the ability of Americans to save, and they’re still struggling to catch up, according to forthcoming research by Karen Smith at the Urban Institute, a non-profit research organization. “The drop in real wages has the biggest effect” on retirement savings and income,” Smith said in the video shown here. “When wages fall, we earn less, we save less, and we lose the investment returns on those lost savings.”
But what about psychological reasons, such as denial? I labeled another psychological state The Big Freeze in a 2011 article: people don’t know what to do, so they do nothing. For others, saving for retirement is a lot like dieting – downright unpleasant.
Whatever the reasons, evidence is overwhelming that Americans are ill-prepared for retirement: In 2010, the typical U.S. baby boomer households had $42,000 in their retirement plans at work, a few bucks lower than their 2004 balances, according to the Center for Retirement Research. More than half of all Americans are “at risk” of having a lower standard of living once they retire, up from 43 percent in 2009, the Center estimates.
[Full disclosure: the Center funds this blog, and T. Rowe Price is a corporate partner of the Center.]
Retirement savings is not easy to think about, much less act on. But hopefully readers will weigh in!
When I read advice about how much we should save, it is unclear to me whether the percentage is calculated on pre-tax income (like contributions to a 401(k)) or based on your take-home pay (after all the taxes, health insurance, etc. have been deducted). When in doubt, I guess more is better!
Yes, the chart at the top of this article shows the recommended savings as a percent of total salary or wages – that is, before taxes are taken out of your paycheck.
Thanks for the question!
This is always a hot debate question and, unfortunately, I always side with the camp that doubts our society. People are just naturally bad at saving and getting their priorities straight. When left to save for retirement on their own, they always have some tired excuse of why they weren’t able to max out their contributions. This is too bad because the Internet is full of great tips and articles that can teach you how to do a better job and what the potential benefits are. I personally advocate trying to reach the full IRS max every year, but that’s only because I would like to be financially free much sooner than normal (in my 40’s). Good topic!