Monday, January 30, 2012

Barriers to Retirement 4: Lack of Savings, Lots of Debt

piggy bankThis continues our examination of why most people will reach retirement ill prepare to retire

We discussed that most people rely on 5 sources of money to retire: 1) a pension, 2) Social Security, 3) home equity, 4) savings & 401K, and 5) investments. Previously, we analyzed that most people will lack a benefit-defined pension. Only 12% contribute fully of their pension. We explored the uncertainties of Social Security and the illusion of a paid off mortgage.

Today we confront the brutal facts about savings.

Most People Don’t Save—They Go Into Debt

Statistics indicate the average savings rate at 6%. That represents that the average amount of money we maintain in a savings account. Some of us save significantly more than 6%. The more saved, the better chances we can retire.

Unfortunately, others save significantly less than 0%.  25% have no savings at all. They not only do not save, they sell future savings—at an interest—on credit cards.  Some people owe between $7-20,000. The average American owes $117,000 in debt: house, consumer, and more. While most intend to pay the card down to $0 each month, they make minimum payments. Cars breakdown. Medical problems occur. Life happens. Since very few of us maintain sufficient savings, we use the money we targeted to pay the card down to cover the emergency. Consequently, most of us will reach retirement age in debt, rather than enriched with savings.

And I did not include student debt of $30-400,000 which prevents adequate savings.

We Lose the Power of Compound Simple Interest

Most of us remember the lesson on compound simple interest. If we started with a bank balance of $500, and put $25 a month into a normal savings account every month for 40 years—and do not take it out—that the multiplying effect of compound simple interest will increase our savings to 353,442. If we begin saving from 50 to 60 and put $500 a month for 15 years we would have only $252,788. Try this yourself using a compound interest calculator.

Yet, we still wait until the last years of work to start building our savings. I waited. You probably waited. I taught the principle to my children. They waited. Most young people let other things distract them from saving. Most older people regret they did not save.

Join me on Wednesday we I discuss the realities most of us face with investments

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