It should not come as a surprise to readers that America is in the midst of a retirement savings crisis. One indication of the severity of this problem is that 55% of Americans cannot replace a month of lost income, but what is probably more alarming is the sum of money families have saved for retirement. According to the Employee Benefit Research Institute, people in their 60’s have an average 401k balance of only $304,000 while the overall average of all survey participants was $130,493. That statistic should be frightening not only for the account holders but also for the rest of Americans, as those people will likely require some form of financial assistance once they retire. Some people blame this gap on the shift from pension plans to 401k plans, which places more pressure on individuals to make wise investment decisions, while others blame it on a lack of education about retirement needs. Whatever the cause, Americans of all ages should begin thinking creatively about how to solve this issue for themselves, and it is clear that it should be a priority in Washington as well.
Silent Generation: Born 1945 and before (Ages 70+): It is safe to assume that the majority of people who fall into the Silent Generation have already retired from work and begun making withdrawals from retirement accounts. Although the options to improve financial health at this stage are limited, there are still several options that should be considered if retirement amounts are not sufficient. One way is by moving to a tax advantaged or low cost of living location, which can preserve savings while still allowing for an enjoyable retirement. Another inexpensive way to save money is by simply remaining fit and healthy. Regular exercise has been proven to lower healthcare costs and raise quality of life. Healthcare costs are one of the largest concerns of retirees, which makes sense given that some late in life care options cost in excess of $80,000 per year.
Baby Boomers: Born 1946 to 1964 (Ages 52-70): Baby Boomers account for about 25% of the US population while controlling 80% of all personal financial assets. As these individuals transition from their peak earning years (40-55) to retirement, significant planning issues must be reviewed. Baby Boomers should have a high level of confidence in their savings before retiring because obtaining employment after the age of 65 is difficult. If the Baby Boomers are business owners, they should begin thinking about succession planning. According to CNBC, the vast majority of small businesses in America do not possess a solid succession plan, which leaves their business in jeopardy after retirement. Business owners should make sure employees are sufficiently trained to take control of a business, thus ensuring ample liquidity for the outgoing owner during the transfer of ownership.
Generation X: Born 1965 to 1976 (Ages 40-51): As Generation X embarks upon their peak earning years, it is important that they strongly consider working with a financial advisor to consider all of their retirement savings options. Generation X members should take full advantage of employer sponsored 401k plans as well as IRAs (Roth and Traditional). One notable clause in these plans is that once a person reaches the age of 50, they are able to make additional contributions under the “catch up” provision. (The amounts of these catch up provisions vary by plan.) In addition, pre-paid college tuition and 529 plans can be a great place to store savings as the funds will grow tax free until withdrawn for educational expenses.
Millennials or Gen Y: Born 1977 to 1995 (Ages 21-39): The number one problem facing Millennials today is debt. Although Millennials do not struggle with credit card debt as much as Generation X, they do have significant levels of student debt. Over 65% of public college students currently graduate with an average debt of $25,550, with the numbers much higher for graduates of private colleges. Student debt loans are increasing at a rapid pace as educational expenses rise, so borrowers should work with a financial advisor to determine the optimal repayment method they should utilize to repay debt. Depending on the interest rate of the loan and the circumstances of the borrower, it may make sense to save money in an IRA instead of paying down the principal. In addition, as Millennials leave college, they should also take full advantage of employer sponsored benefit plans, which sometimes match contributions by the employee.
Centennials: Born 1996 and later (Ages 20 and below): Centennials may be a long way from retirement but decisions that they make today may go a long way towards a successful retirement. The Empowerment Institute has gone to great lengths to determine the likelihood of a successful retirement, and one of the most critical components is contributing 10% of household income from the earliest moment possible. Investing small amounts of money at a young age is a great way to ensure against falling behind the retirement gap, and more importantly to develop the habit of saving.
The retirement and savings gap is something that everyone should understand, regardless of age. Committed savers should spend time with a trusted and knowledgeable financial advisor so that they can plan for a comfortable retirement. Starting early is critical because with the passage of time, the ability to catch up becomes increasingly harder.