Talk About Money: The $6 trillion retirement deficit

In the past couple of years, it seems as if the political pundits and media have done a good job of alerting us to the ballooning federal budget deficits, with little focus on our collective retirement deficit — the shortfall of our present savings to meet our future retirement income requirements.
A new study conducted by Boston College’s Center for Retirement Research has done a good job of sounding the alarm to our growing dilemma. The study found American workers between the ages of 32 and 64 were $6.6 trillion short of the money they’d need in retirement.
A confluence of events has brought us to this precarious position. Some are longer-term trends and structural shifts, such as the migration from pensions to defined contribution plans, our perpetual inability to address the underfunding of our Social Security trust fund, our continued increasing life expectancies and our appetite for debt. Other causes of the deficit are recent market realities, such as falling portfolio and retirement account values, diminished home equity and constricted rates of return on our investments. With a proper perspective of all those factors, it should be apparent to any astute workers and retirees that our retirement expectations are largely unrealistic. (Don’t tell that to the 2.5 million workers in France who were protesting the increased age of retirement a few weeks ago!)
The message to all of us should be clear: We are largely responsible for our own well-being during retirement, and we must start planning accordingly or suffer the consequences. Here are a few tips to better ensure that your path toward a successful retirement remains on even ground:
Save often
Study after study has shown that the rate of your savings is ultimately more important than the rate of return on your savings. The amount you save is crucial to your eventual success. A good rule of thumb is to save 15 percent of pre-retirement salary for 30 years or more, with 50 percent invested in stocks, to have a high probability of not outliving your retirement savings. If you are uncomfortable with stocks or investments in general, then you had better save even more.
Save automatically
Establish monthly automatic deposits from your checking into your savings, investment or retirement accounts. Once you have established a systematic way to save, you will learn to live with the money that is left over in your checking account. “Out of sight, out of mind” truly can have a powerful effect on savings over time.
Clear your debt
Pay off all of your debt before you retire. Being relieved of the fixed expense of your mortgage is a huge benefit.
Spend cautiously
Once you are retired and taking income from your savings, use a conservative withdrawal rate. Many academics consider 4 percent as a safe rate of withdrawal to ensure you don’t outlive your savings, but it’s not a guarantee. The younger you decide to retire, the lower your withdrawal rate should be.
Wait to retire
Consider delaying retirement, or work in a “bridge” job for as long as possible. Delaying retirement has multiple benefits. The first and most obvious is that your future Social Security benefits increase by as much as 8 percent for each year you wait beyond your normal retirement age, up to age 70. (See http://socialsecurity.gov for more info.) The second is that when you retire before age 65 (when Medicare kicks in), you will often be responsible for your entire health insurance premium. That’s an added expense it is best to avoid. Finally, the longer you wait to retire, the longer your assets have the opportunity to grow and compound without the strain of supporting you.
American workers need to begin making some hard choices when it comes to planning their retirement. To borrow a word from France, where those protests were just taking place, a laissez-faire attitude toward future prosperity in our golden years will no longer do.
Orion Melehan is a certified financial planner for LMC Financial Services in Scotts Valley. Contact him at 454-8042 or or***@lm**********.com.
Securities and investment advisory services offered through SagePoint Financial Inc. member FINRA/SIPC a registered investment advisor. LMC Financial Services is not affiliated with SagePoint Financial Inc. or registered as a broker/dealer.