I am not exactly sure why but for some reason people seem very ignorant of the wealth distribution by age. The richest group by far are those over 65. There are several reasons for this including self preservation. Once you stop working you better have a large pool of capital or you will most likely have little income (you could have a great pension and no other savings but…). Another is that the “miracle” of compound interest. Those that actually saved enough for retirement often find their investments out-earning their spending thus wealth increasing yearly. This effect over time results in wealth increasing dramatically. Many of those that failed to save enough will have their savings dissolve very quickly thus leaving the inverse of a bell curve (a high number of wealthy and of poor and a lessor number in the middle). Social Security helps those that failed to save enough for retirement to slow the decline (and those that saved enough to become even wealthier even faster). The presence of large numbers of poor elderly I think is one reason so many are surprised that they are the richest age group.
I used to be surprised how few people know this – now I know, for those I talk to anyway, they are always surprised. This has several public policy impacts such as why do we have a huge “social security transfer system” (social security including medicare) to move money from the young to the old when the old are wealthier than the young? People see the 7.65% deducted from their check but the employer has to pay an equal amount to this transfer of wealth between the generations bringing the total to 15.3%.
It doesn’t make much sense to me to have those working at Wal-mart and McDonalds transfer 15.3% of the income from their labor to much wealthier people. Yes, paying something in I think is fair. But the system should be adjusted. One method I would use is to reduce (or eliminate) payments to the wealthy elderly (continuing the existing payments to the poor elderly is affordable so I see continuing those payments as good public policy) and reduce taxes on the working poor. Obviously others disagree so we transfer a large amount of money from those working at Wal-mart to those with hundreds of thousands in investments. I think this is wrong. I wish at least the facts would be known so that the decision is made with awareness of the facts.
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The growing divide between the rich and poor in America is more generation gap than class conflict, according to a USA TODAY analysis of federal government data. The rich are getting richer, but what’s received little attention is who these rich people are. Overwhelmingly, they’re older folks. Nearly all additional wealth created in the USA since 1989 has gone to people 55 and older, according to Federal Reserve data. Wealth has doubled since 1989 in households headed by older Americans.
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The implications are far-reaching and can turn conventional wisdom on its head. Social Security and Medicare increasingly are functioning as a transfer of money from less affluent young people to much wealthier older people.
Wow, I don’t recall seeing publications actually point out this fact very often. Good for the USA Today.
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Current vs. retirement income: How much do I need?:
After all, rules of thumb are shortcuts; they’re solutions that are supposed to work for the “average” person.
Good advice. The rules of thumb can help you get an idea of the ballpark for a fictional “average” person in general. But your particular situation is different.
Have less than $25K in savings? Get in line
What is a very rough estimate of what you need? Well obviously factors like a pension, social security payments, age at retirement, home ownership, health insurance, marital status… make a huge difference in the total amount needed. But something in the neighborhood of 10-25 times your desired retirement income is in the ballpark of what most experts recommend. So if you want $50,000 in income you need $500,000 – $1,250,000. Obviously that is difficult to save over a short period of time. The key to retirement saving is consistent, long term commitment to saving.
Related: Saving for Retirement – Start Young with 401k and Roth IRA – Retirement Delayed: Working Longer
Boomers on brink of retirement wonder if they can afford it:
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Scholz doesn’t go that far, but he does question the popular notion that most baby boomers are “blowing it” in their preparation for retirement. He says the group’s research showed that, by and large, Americans born between 1931 and 1941 were faring quite well financially during their retirement. “That was very surprising to us,” he says. “So then an interesting question is, does the experience of that generation carry over to households that are younger?”
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“They’re like, ‘Well, I finally got a cell phone.’ They use a computer but it’s one that’s eight years old. Their cars run forever.” That mindset is far different from most baby boomers, Haunty argues. To them, items once viewed as luxuries are now considered necessities. And, he adds, this “propensity to consume” is even more prevalent among Americans in their 20s and 30s. Haunty says he’s not advocating that baby boomers “save every penny and wear the same jeans they wore 10 years ago. But they’ve got to strike a balance.”
Well said. If you have enough money to afford whatever you want and can maintain an emergency fund, buy disability insurance, buy health insurance, save for retirement, avoid personal debt, save for children’s education… great. If not, then choices need to be made about what is most important and then you get to live with the consequences of those choice.
There are few investment opportunities as valuable as IRAs (tax sheltered retirement accounts) – nor many more critical to successful personal financial success (for younger or older really). Roth IRAs a smart bet for younger set by Tami Luhby.
The beauty of the Roth IRA and 401(k) is that there’s no tax on the capital gains in the accounts, so the longer you have to accumulate those gains, the better.
Mathematically, if the tax rate in the year of the contribution and the tax rate at the year of withdrawal are equal a Roth IRA and regular IRA provide the same value. However, in addition to earning less money in while young and therefor being in a lower tax bracket there is also the benefit from a Roth IRA of eliminating the risk of an increasing tax rate structure. Since money withdrawn from a Roth IRA is not taxable. This is a huge benefit.
So add to your IRA for last year if you have not already and add to your IRA for this year now. Also add to any employer matched 401(k) for your long term retirement savings. Few investments will have the long term impact of adding to retirement accounts early and often.
Related: Saving for Retirement
The Washington Post really doesn’t like Social Security … by Brad Setser
This is not the way the story is normally told. Social Security is actually in good shape for at least 30 years. That doesn’t mean it is not a big problem after that but Brad Setser makes a good point that the huge increase in the rest of the debt has really made that problem seem minor. The main point? We need to fix the rest of the budget mess, and while I still think Social Security needs adjustment really that is not as important as fixing the rest of the spending money the government doesn’t have.
Related: Estate Tax Repeal
In an instant, retirement savings vanish by Bob Sullivan:
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Few consumers appreciate the fact that, unlike credit card and checking account transactions, there are no federal consumer regulations specifically protecting consumers in the event of brokerage account hacking
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Both credit card transactions and electronic account transfers, such as online banking payments, are governed by Federal Reserve regulations that strictly limit consumers’ losses from theft. Consumers who report credit card fraud are only liable for $50
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Despite the lack of legal compulsion, some investment firms have taken to offering broad consumer protections anyway. Both e-trade and Charles Schwab offer credit-card style guarantees. Money stolen from Charles Schwab’s Web site will be returned to consumers as long as the theft is reported in a timely way, said Schwab’s Greg Gable.
This risk is something the government should address. The risk is to the economy at large, as well as having extreme consequences for individual investors. We need to do as much as possible to encourage retirement savings. Not providing government backing (such as provided by FDIC…) is a mistake. The funding should be similar to that for FDIC where member banks are assessed fees to cover the costs of the program based on the risks seen in that institution.
FDIC has done a great job of creating an environment that gives individuals confidence in the system and encourages economic development. Securities Investor Protection Corporation is another possible model but for something so important to the economic security of the country (and individuals lives) direct government involvement makes sense to me.
How to make your kids millionaires by Walter Updegrave:
Your first goal: Encourage them to contribute enough to get the employer match, without worrying about sorting through all the investment options. Just have them stick the money in a target retirement fund (or if that’s not an option, a stock-index fund).
You can talk to them later about boosting their contribution and fine-tuning their strategy.
Related: Saving for Retirement – Start Young with 401k and Roth IRA – what is a 401k? – articles on investing for retirement
Putting away some money is vital, even if you are young and in debt by John Waggoner:
Starting small – If you don’t have a 401(k) available, at least open a Roth IRA. You contribute after-tax money to a Roth, but you pay no taxes on your withdrawals at retirement.
More on Roth IRA’s.
Retirement planning has some pretty straight forward aspects and some difficult to predict aspects. If you don’t save substantial amounts of money over a long period of time there is little hope for a good retirement nest egg (outside of things like winning the lottery or living off an inheritance). So consistent savings over a long period is normally a requirement. You can get decent estimates like saving 8% of your income from age 30 to age 65 (in a 401k, Roth IRA…) but how you investments perform during that period will have a large impact on your success (as will how much risk you want in retirement, the state of health care at that time, inflation, tax rates, your health insurance…).
This is a good article discussing some options as you close in on retirement and the financial picture become clearer: Two More Years for a Better Retirement. From Fidelity: Survey: One-Third of Americans Delaying Retirement.
One alternative to delaying retirement is to start saving more earlier but the overall data shows few are taking that option.