Would You Rather?

With school starting back up, I was reminded of a popular book at my granddaughter’s elementary school called Would You Rather. One kid poses the questions – the others pick between two choices that are similarly humiliating, nauseating or painful.

  • Would you rather lose your swimsuit on the water slide or lose your lunch on the roller coaster?
  • Would you rather eat chocolate covered bugs or fried road kill?
  • Would you rather have a skunk spray you in the eyes or in the mouth?

You get the idea.

As strange as this might sound, with the right questions, Would You Rather could be a good exercise for today’s workers, particularly the 43 percent reporting neither they nor their spouse are currently saving for retirement[1].

I’ll skip the humiliation and nausea and go straight to the pain. Would you rather live in or near poverty during retirement, or change your spending and savings habits to fund a substantially better lifestyle post-career? Because here are the facts – based on current Social Security benefit levels[2], absent other sources of income, 44 percent of those receiving retiree benefits would be in or near poverty:

  • Some 11 million retired workers would be below the 2014 poverty level ($11,670 for a single person household)[3]
  • Nearly 6 million others would be “near poor” (between 100 and 125 percent of the poverty threshold)[4]

This is not a knock on Social Security. That system was never meant to be a retiree’s sole source of income. Rather, it was meant to be a foundation that, when supplemented by company or personal pensions and personal savings/investment, could provide income security in retirement.

Those choosing to make Social Security their sole source of income in retirement will likely find their golden years not so golden. I truly believe that after 30-plus years of work, no one should have to live out their lives in a fragile financial state.

So what’s the solution?

Longer-term, workers need to get to a point where they’re saving at least 10 percent of their salary toward retirement. Near-term, it’s about recognizing two things: that a little savings can go a long way; and the importance of starting to save now.

Life is hectic and convenience often rules the day in spending decisions. Yet saving an extra five dollars every day adds up to about $150 a month or $1825 over the course of a year. That alone can get you an extra half million dollars at retirement[5].

If you wait until you’re 35, you’ll need to save more than twice what you’d need to save per month if you started at age 25, and about 50 percent more per month than if you started saving at age 30[6]. Clearly, there’s a huge benefit from saving early in one’s working career. There’s also a huge benefit from saving through an employer-sponsored retirement plan, particularly when the employer provides a matching contribution (and 92 percent do)[7].

While my granddaughter would most certainly find this version of Would You Rather pretty boring, it does highlight the power each of us has to increase both the number and quality of our choices. The benefits of spending discipline can go well beyond retirement savings, freeing up dollars for a major purchase, emergency savings, or a down payment on a home. Over the long-run, I think my granddaughter would also like what it could do for her college savings account, and love it if it meant a nice vacation with grandma and grandpa.

 

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[1] EBRI Retirement Confidence Survey, March 2014.

[2] http://www.socialsecurity.gov/oact/ProgData/benefits/ra_mbc201312.html

[3] https://www.federalregister.gov/articles/2014/01/22/2014-01303/annual-update-of-the-hhs-poverty-guidelines#t-1

[4] https://www.fas.org/sgp/crs/misc/RL33069.pdf

[5] Balance at age 65, assumes saving of $150 a month for 40 years, and an annual return of 8 percent.

[6] To accumulate approximately $500,000 at age 65, assuming an 8 percent annual return, an individual must save $150 per month for 30 years starting at 25 (then growing another 10 years), $224 per month for 30 years starting at age 30 (then growing another 5 years) or $333 per month for 30 years starting at age 35.

[7] Trends in 401(k) Plans and Retirement Rewards, WorldatWork and the American Benefits Institute, March 2013.