A Little Financial Literacy Can Go a Long Way on the Road to Retirement
We’ve all seen or heard the stats about how unprepared Americans are for retirement, and frankly, they are scary. It’s no secret that there’s a growing problem with Americans’ retirement funds and savings overall, but solutions require more than simply telling people to save more. Each generation experiences its own set of issues and challenges – including large sums of credit card debt, massive student loan balances, stagnant wages, underemployment and rising housing costs in many urban areas.
Additionally, the long-term effects of the Great Recession are still with us, both in terms of personal financial outcomes, as well as emotional scars – much like the lasting effects that the generation that lived through the Great Depression experienced. However, as we’ve seen through the work of many of our banking clients, with a little financial literacy and the courage to take small steps to address these challenges, we can all eventually become better at saving, and in turn, have more stable financial futures.
A look at the problem
A recent study by Northwestern Mutual found that 21% of Americans have nothing saved for retirement and another 10% have less than $5,000 in savings. Equally alarming is that one-third of Baby Boomers currently in or approaching retirement age have between $0 and $25,000 set aside.
Figures from the Economic Policy Institute (EPI) are even more daunting. The numbers were even worse for Millennials, with more than two-thirds having no retirement savings at all.
These numbers are a big reason why the financial services industry runs awareness campaigns encouraging people to save more. These firms collectively spend millions of dollars on financial literacy programs to help educate people about the problem, make them feel more secure in their financial decision-making and inspire them to act. Granted, it is also in these companies’ best interest for people to save and use their accounts, services and mutual funds to help manage their assets and generate fees, but they are also trying to be part of the solution to a growing problem.
Small solutions lead to big rewards
So, how do we tackle this problem when many financial advisors believe that the average 65-year-old should have between $1 million and $1.5 million saved for retirement to maintain a reasonable standard of living? To many that seems like a huge number that is completely out of reach. Many experts in behavioral finance will tell you when a financial goal seems out of reach, that instead of trying, many give up and don’t make the sustained effort it takes to move the needle – even when it is in their own best interest.
Below are a few things to keep in mind that demonstrate incremental steps can make a big difference over time:
1. The Power of Compounding: Saving $1 million can seem like an impossible task. However, if you put just $3,000 a year into an IRA and invest it in a S&P 500 index fund, and that fund generates just an 8% annual return (which the index has averaged since 1988, even factoring in the Great Recession) you will have $1,069,000 at age 65. So, it is possible, but if you wait until age 32 to start saving the same $3,000 a year, you’ll only have $473,000 at age 65. Starting early can turn a molehill into a mountain … of cash.
2. The Power of Tiny Behavior Changes: Many people are strapped and can’t think of where they would come up with $3,000 a year to put into an IRA. Start with tracking your spending. Find out where you are spending your money today and the changes you can make to reach your objective. Say, for example, you spend $2 a day on a morning coffee and $10 on lunch on work days. If you can brew your morning coffee at home and bring a lunch you would save roughly $10 a day or $50 a week. Over the course of a year that would be about $2,500 – you have now nearly reached your goal and haven’t really had to make too drastic a change. Imagine where else you could turn wasteful spending into savings if you kept track.
3. The Power of Financial Apps: There are tools aplenty, and many are free. A quick visit to the App Store and a search of financial tools produces a treasure trove of online financial assistance. There are apps for budgeting, banking, education and investing. Investing through several online apps can put the power of buying stocks, bonds or mutual funds in your hands with real-time quotes and instant trade execution. In addition, the fees and account minimums for online trading are approaching zero, with some firms already using that approach. It has never been easier for an investor with a relatively small amount of capital to participate in building long-term wealth.
Two famous quotes taken together really sum this up. Ben Franklin is oft-quoted that “a penny saved is a penny earned.” Albert Einstein, by varying accounts, either called compound interest “the most powerful force in the world,” or “the eighth wonder of the world.” It can be pretty amazing to see how quickly those saved pennies can turn into dollars that can multiply themselves – and with enough time create a meaningful nest egg for you and your loved ones. The good news is that today there are more resources than ever to help you on your journey of financial literacy.