When am I going to retire? How much money am I going to need? How long will the money need to last?
These are valid questions to ask, and ask often, but it seems they have grown in importance as the COVID-19 pandemic has raged over the past 21 months.
Pre-pandemic, many economists were worried Americans were facing a growing retirement crisis. According to the Center for Retirement Research at Boston College, a 65-year-old American is expected to live an average of another 19.4 years, and the typical retirement-age American spends $50,220 a year. That means the average American who wants to retire at 65 needs an estimated $1.12 million to enjoy a comfortable retirement. But a 2019 report from the Federal Reserve found that nearly one in every four American adults have no retirement savings.
During the economic crisis brought on by the COVID-19 pandemic, as many companies were forced to furlough and lay off employees, many Americans not only stopped contributing to their retirement plans but also withdrew funds so they could survive. With variants continuing to slow the economy and raising inflation, along with escalating housing, healthcare, and long-term care costs, many are all but sure the days of packing up the office at 65 for a life of leisure are but a dream to but a handful. Today, most Americans (59 percent) believe that they will have to keep working longer to be able to retire comfortably and 36 percent say they will never have enough money to be able to retire at all, according to the latest data from the Natixis Global Retirement Index. Of those who are still holding on to hope that the day will eventually come, 41 percent said their ability to be financially secure in retirement is “going to take a miracle.”
Still, experts say there are ways to start saving that could produce enough predictable income that lasts through retirement so that the golden years aren’t tarnished or elusive.
“Savings is important,” said Gregory Ricks, founder and CEO of Gregory Ricks & Associates, a Metairie-based independent financial advisory firm that specializes in creating custom financial and retirement plans. “It gives yourself life options. You can choose to do something else. You could choose to not work or change jobs or keep working. Savings gives peace of mind. You should not have a reason to save; it’s a basic principle we all should have and do.”
Looming Retirement Crisis?
Living through both the pandemic and the Great Recession of 2007 to 2009, the second-worst economic crisis in U.S. history when 8.8 million jobs and $19.2 trillion in household wealth were lost, according to the U.S. Treasury Department, has been a one-two punch to the financial gut for Generation X (ages 44 to 55) and Millennials’ (25 to 43) dreams of achieving financial security in retirement. According to the National Institute on Retirement Security (NIRS), 64 percent of Millennials and 54 percent of Generation X have increased concerns about their retirement security compared to 42 percent for Baby Boomers (56 to 74) and 25 percent for the Silent Generation (75 and older). Much of their concern comes from Americans’ achieving longer life spans and the associated rising health and long-term end of life care costs facing them in the future that will not only reduce their standard of living but also hinder their ability to meet their basic needs in retirement. Rising costs are also a cause for concern. Inflation rose 6.8% in November compared to the previous year, the fastest acceleration since 1982, according to Consumer Price Index data.
If there is good news for Louisianans, it’s that the cost of living in the Pelican State is relatively inexpensive. According to 24/7 Wall St., an online financial news company, the average retiree in Louisiana will need $918,844 to live comfortably through retirement. That’s seventh least in the nation. The average nationwide is more than $1.12 million.
Age for full Social Security retirement benefits for full retirement age (FRA) workers
Year of birth………………..FRA
1937 and earlier…………..65
1938…………………………..65 & 2 months
1939…………………………..65 & 4 months
1940………………………….65 & 6 months
1941…………………………..65 & 8 months
1942………………………….65 and 10 months
1955…………………………..66 & 2 months
1956…………………………..66 & 4 months
1957…………………………..66 & 6 months
1958…………………………..66 & 8 months
1959…………………………..66 & 10 months
1960 & later………………..67
Source: the U.S. Social Security Administration (SSA)
Most American employees have an account with the U.S. Social Security Administration (SSA) that collects taxes from 12.4 percent of their income paid equally from their pay and employer and is available for monthly disbursement when they retire.
Social Security has become the fallback retirement option for many Americans, but even the SSA says “the average Social Security check was never meant to replace a retired worker’s full income.”
The administration recommends that Social Security not be a retiree’s single source of income, but part of a diversified financial retirement plan.
The average Social Security check for retirees in August 2021 was $1,558.54, according to the SSA. That’s just $389.64 a week.
Ricks said Social Security was designed to take care of the poor.
“For the average worker, Social Security was originally designed to replace 40 percent of their income,” he said. “For the poor, it was designed to replace 90 percent of their income.
The SSA increases its payment with annual cost of living adjustments (COLA). They are usually relatively small – between 2013 and 2021 its average was 1.43 percent – but the increase for 2022 is 5.9 percent due to COVID-related higher inflation.
How much a retiree receives from Social Security depends on how much they have earned over their working lives, COLA increases, and when they begin to take benefits. Age 62 is the year at which people first become eligible for Social Security. However, by claiming early, they will receive permanently reduced monthly benefits. If instead they wait until full retirement age – up to age 67, depending on when someone was born – they will get 100% of the benefits they earned. If they wait until 70, they will maximize their monthly benefit amount.
One of the main criticisms of Social Security is that most of the payroll taxes collected from today’s workers are used to pay benefits to today’s recipients. Another is potential lack of funds. An August report by the Treasury Department said The Old-Age and Survivors Insurance Fund is only able to pay scheduled benefits until 2033. That means a likely deduction in benefits, a tax increase, or both.
“The way it’s set right now, if Congress doesn’t do anything to fix that, benefits will be reduced,” Ricks said. “It’s been more than 30 years since they increased the payroll tax. So, they could increase the payroll tax 1 percent on both sides of employee and employer side, and it probably fixes it for the next 75 years or so.”
He said Congress will be forced into action because no politician will want to call for a benefit cut and alienate a big block of voters. Instead, he sees incremental increases added to payroll taxes and/or additional taxes on Social Security benefits.
“At some point somebody’s going to raise the taxes,” Ricks said. “Fifty percent of the population has not saved money, so half of them are dependent upon it. Then, of those who have saved, half of them don’t enough, so they are dependent upon it, too. So, unless the politicians want to cause the next great recession they won’t cut back Social Security. It would wreck the economy, so they’re not going to let it happen.”
Individual Retirement Accounts
In addition to Social Security, experts recomend Individual Retirement Accounts or Arrangements (IRAs), which allow people to make investments, usually made up of stocks, mutual funds, and bonds, into a retirement fund. Investments involve risk of possibly losing money. Generally higher risk means higher reward, but there is also the chance for higher losses.
Traditional IRAs are set up by individuals. They work by depositing set amounts of money into the investor’s account(s). If pulled from a paycheck, it is taken before the amount is taxed. While investors get a tax break on the front end, distributions, including earnings, are includible as taxable income at retirement. While money can be pulled from the account at any time, if you are under age 59 ½ you may have to pay an additional 10 percent tax for early withdrawals unless there is a qualified exception.
Roth IRAs are similar, except that money is shifted to the account from the employee’s pay after it has been taxed and qualified withdrawals can be made without taxes or penalties.
Payroll deduction IRAs, like 401(k), and 403(b)s, are accounts set up by an employer for the employee, who choose to have a portion of their wages to an individual traditional or Roth account. Many employers will put a percentage of the employee’s salary in the account and match a certain percentage of the employee’s contribution. Experts say this is one of the fastest ways to increase your nest egg because and employee’s contributions are doubled by their employer’s match and that sum grows through compounding interest.
Compound Interest’s Rule of 72
The “Rule of 72” is an easy calculation to help understand roughly how long it will take money to double with compound interest by dividing 72 by the account’s interest rate to determine the sum. Figures shown with no additional contributions to the principal and interest compounded annually.
Principle Rate Years Total 36-year Total
Source: Investor.gov compound interest calculator
The magic of compound interest
If Guy Williams, president and CEO of New Orleans-headquartered Gulf Coast Bank & Trust has a catchphrase, it’s “Interest never sleeps.”
Williams said retirement plans are designed to grow through compounding interest on the principle and earned interest in the account. The longer the account is open the greater the return. While saving early and continuously during working years is difficult for many, it is the tried-and-true method to get ahead.
“Keep doing it year after year and you are going to be fine,” Williams said. “But you need to start early. If you start at age 25 and stop at age 35 and your friend – same age, same interest rate, same monthly contribution – starts at age 35 and continues until age 65, believe it or not, you will be ahead at the end.”
According to the compound interest calculator at Investor.gov, a website run by the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy, a 25-year-old who invests $5,000 every year for 10 consecutive years ($50,000 total) and makes no additional investments after they turn 35 will have approximately $787,180 if they keep the account open until they reach 65. The 35-year-old who invested $5,000 every year for 30 consecutive years ($150,000 total) will end have roughly $611,730.
Ricks says the “Rule of 72” is an easy calculation to help understand how long it will take money to double with compound interest by dividing 72 by the account’s interest rate to determine the sum.
“If your money is earning 7.2 percent, using the rule, it doubles every 10 years,” he said. “If you were able to accumulate $200,000 by age 40, even if you’re not adding anything to it, at that return, it goes from $200,000 to $400,000 at 50. Then by 60, it’s gone from $400,000 to $800,000. At 70, you’re at $1.6 million.
“When you’re young, it seems like it takes forever, but it’s like a snowball growing as it rolls downhill,” he said. “It’s slow, but it just keeps growing and growing, and then it grows more and more and more. That’s the magic of compound interest.”
Williams says the easiest way someone can ensure they’ll have more than enough in retirement is to start saving early and don’t stop. He recommends starting by putting 10 percent of your salary into retirement savings.
He says the advantage of retirement contributions coming out of a paycheck pretax is that people should set their budgets without that amount in mind.
“You’re not going to miss it because you don’t see it,” he said.
Trying to save money by using take-home pay is difficult and requires a ton of discipline.
“I’ve seen it over and over again where people think, “Oh, I’m going to save whatever is left after I pay for my expenses and then there’s nothing left.”
No matter where one is in retirement savings – from contributing continuously from the very beginning of a career to starting to save mid-career to reaching crisis mode – experts say there are ways people can get ahead.
Williams advises people who get pay increase or pay off debts to shift the amount of their raise or monthly payment to savings.
“When you get a raise or pay off a loan – a car loan, house loan, student loan – put that payment into savings every month,” he said. “You were already living without it. If you don’t put it aside for the future, in six months it will have disappeared into your budget, and you’ll have no idea how you made it without that money.”
COVID-19 has caused myriad problems, but Williams said it has had some positive effects, including pushing people to adapt to technology much faster, many industries allowing employees to work from home, and individuals reassessing their work-life balance.
“The labor force has changed permanently,” he said. “Baby boomers who were close to retirement accelerated their plans. They’re gone, and they’re not coming back.”
Additionally, many two-earner families have found their lives are better with one person working less to have more time caring for and being present for their children.
“All of these have shrunk the workforce, which means if you want to work, you have more opportunities,” Williams said. “That’s why more Americans quit their jobs in November (the “Great Resignation”) than ever in history. They didn’t quit to go home. They quit to get other jobs. So, if you’re thinking about shifting, this is the time employers are desperate. They’re looking for employees. Everybody’s hiring in every market. It really is a great moment for people to get ahead. There’s never been a better time.”