Even with Low Bank Rates, Higher Savings Rates are the Best Protection

Higher Savings Rates Can Cushion You Against the Unexpected

A recent poll released by the Employee Benefit Research Institute (EBRI) demonstrates how the recent economic crisis has taken a toll on people's retirement plans. In the end, it sends a clear message about the need for Americans to raise their personal savings rates.

Recent Poll Shows the Unexpected Has Arrived

The retirement age of American workers has been edging up over time, from a median of 62 years old in 1991 to 65 years old today. That's not necessarily a bad thing--people are living longer, so a longer career is to be expected. However, a rising retirement age should only be welcomed if it is a matter of choice rather than necessity due to insufficient retirement savings.

The recent EBRI poll shows that the reasons Americans delay retirement have shifted from choice to necessity. Just last year, the number one reason given for delaying retirement was the need to pay bills or pay for new purchases. This can be seen as a choice: people willing to work longer so they can spend more now.

This year, though, the number one reason given for delaying retirement was the poor economy. Close behind as the number two reason was the need to make up for stock market losses. In other words, Americans today are not working longer because they choose to spend more; they are working longer because they can't afford to retire.

Worse still, working longer doesn't always turn out to be a viable option. The EBRI also found that nearly half of retirees (47%) were forced to leave their jobs earlier than expected because of poor health, changes at their place of employment, or other reasons.

The message here is not just that the unexpected can wreak havoc on your retirement plans. It's also that trying to make up any shortfall on the back end of your career is a risky approach.

Higher Savings Rates Help Shield You From the Unexpected

By definition, you can't completely prepare for the unexpected. What you can do, though, is give yourself a better cushion by getting those savings rates up and making better decisions about your retirement assets. Specifically:

• Save earlier. Think of saving early as spreading your retirement burden out over more years--it makes the load easier to shoulder. Also, compounding will benefit you more the sooner you start saving.
• Save more. It's not simply a matter of maxing out your 401(k) plan. That's a good first goal, but beyond that you should seek to build up some personal savings.
• Stay diversified. Too many people clamored to jump into the stock market when it was hot in the late 1990s. Savings account rates may seem low, but they look good compared to the return on stocks over the past decade. Stocks have their place, but don't abandon your conservative investments to chase the next market rally.
• Shop actively. You can't control the overall level of bank rates, but you can get a better deal by shopping around. A recent compound interest infographic on money-rates.com showed how even a 1% difference in savings account rates can make a substantial difference over time.

Recent statistics about retirement are sobering, but by working a little harder and smarter at saving for retirement, you can increase your chances of being on the right side of these statistics.

Source:

Why Are Americans Delaying Retirement? • Oct 01, 2009 • Employee Benefit Research Institute: http://www.ebri.org/pdf/FFE138.01Oct09.Finl.pdf