Failure to Save Is an American Disease

Failure to Save Is an American Disease

A new survey by the Employment Benefit Research Institute (EBRI) has confirmed what many people already knew. Americans are not very good at saving and many of them are heading for problems in the future because they are yet to make serious provisions for their retirement. The survey reveals that a significant number of people have less than $1,000 set aside for retirement and around 50% admit they have less than $25,000 in their fund. Perhaps they are relying upon the Social Security System but therein lies a serious problem?

The status of the Social Security System has been under question for some time. The Republicans have had a majority in both Houses of Congress but now there is also a Republican President. Their reluctance to increase taxation is likely to put even greater pressure on a system where fewer people are contributing and more are claiming. Existing benefits will be difficult to sustain beyond the short term yet it was never intended to be a system that could remotely provide a comfortable retirement.

Everyone should have a fairly good idea about what they spend each month even if they don’t have a proper budget. Once there is no pay check coming in each month, the question is how they expect to continue to live to the standard they have become used to enjoying. As life expectancy is increasing, people in their 30s and 40s may reasonably expect to live fifteen years and more after retiring. Even without getting too detailed in the calculations, it is easy to multiply an average number of years by annual spending. The calculations are far more complicated than taking that figure as the fund everyone should be looking to amass. Spending in some work-related areas will cease for example and expenditure currently being made directly because of younger family members will also stop. However, even those 50% who may have $25,000 need with low credit score their funds increase twenty times over.

The Social Security System may contribute but not at a level that can provide anything like half the money that most retired people will need to live comfortably. The Survey actually says that many people are stressed by the realization that they are in trouble; others don’t seem to want to think about it.

The Problem Won’t Go Away

The first step in solving any problem is to identify it exists. Too few Americans seem prepared to tackle their current financial problems, never mind actually save. Is this you?

The level of credit card debt in the country is indicative of the situation. Statistics show that the average debt of people who regularly have an outstanding balance on their card or cards is in excess of $15,000. If you think about the high rate of interest that card companies apply at the end of each month after the user makes a payment, too many people are wasting money that would be far better employed being saved towards retirement.

Act to Clear Debts

Some debt is positive. A student loan can help secure the qualifications that should improve your career prospects. Likewise, a mortgage that allows you to purchase real estate that can help you increase your assets as the value of the property increases over time. However, credit card debt is stressful and one of the first actions that you should take if you need repair your finances is to look at ways to reduce it significantly, and ideally pay it off in full. That can be done with a personal loan which will come at a much more competitive rate of interest. The repayments will be spread over the term of the loan and can therefore be put into your budget. You must be self-disciplined afterwards. Any future spending on the card must be fully settled at the end of the month.

Create a Surplus and Save

You may be able to make savings elsewhere in your monthly spending. Comparative websites offer you some idea of the best utility, insurance and telephone network suppliers. It is worth pursuing any possibility of saving on such regular bills. Use any surplus wisely.

· 401(k)

The best way to save for a pension is through a retirement plan in which your employer contributes, like for like, up to a certain amount. The contribution you make is deducted at source from your paycheck and you are not taxed on that figure. You can expect your employer to add up to the equivalent of 6% of your pay check. You must read all the detail as you would with any financial transaction but there is no doubting the value of having such a plan

· Roth IRA

The alternative to a 401(k) is a retirement account that you set up yourself. If your employer does not provide a 401(k) plan, you need to act for yourself. An IRA can be set up with taxed income but it means that there is no further tax on withdrawals. You have access to this money for things other than retirement in instalments, such as the children’s education

Summary

Whether retirement is impending or remote, funding your later years should be central to your financial thinking. If it isn’t and you have little in the way of savings, expect future problems, serious ones.