Why Americans still aren't saving enough
November 30, 2012
With private pensions largely disappearing and the long-term solvency of Social Security in question, paying for the bulk of retirement now sits squarely on the shoulders of many of today's workers. However, many policymakers and financial experts continue to report that workers are saving far too little and far too late.
Three recent studies attempt to provide some insight into the problem. Collectively, they suggest that while some pro-saving government policies may not be helping most workers reach their retirement targets, the savers who are meeting their goals may not be reliant on those incentives anyway.
Retirement savings lag and policies may not be helping
Retirement savings may be lagging in part because many workers underestimate how much money they will need to live comfortably once they stop working, according to a new study by LIMRA, a financial services industry organization.
Their survey found that pre-retirees between the ages of 55-70 believe, on average, they will need less than two-thirds of their current income once they stop working. However, the LIMRA study says that financial experts typically recommend workers should plan to live on 70 to 80 percent of their current income in retirement.
But unfortunately, tax policies intended to encourage saving may not be improving the situation, according to a new study by Harvard University. To encourage workers to save more, the U.S. government spends more than $100 billion a year in tax incentives for workers investing in accounts such as 401(k)s and IRAs. However, the Harvard study questions whether this money has actually spurred more savings.
Since U.S. data is "inadequate," according to the study, the researchers looked at data from Denmark to draw their conclusions. They found that although government subsidies encourage workers to put money in tax-advantaged funds, the incentives did not produce an overall increase in savings.
Rather, the incentives result in workers shifting their savings to accounts such as 401(k)s and IRAs from other savings vehicles such as CDs, money market accounts and other investments. The Harvard study determined that for every dollar the government spent on incentives, net savings only increased a single cent.
Careful planning works best -- just ask the wealthy
While policymakers may be searching for a way to encourage more savings, a survey from Wells Fargo indicates there may be no magic formula to entice workers to save more. Instead, many of those who have indicated they feel confident they have enough for retirement may have reached that point through old-fashioned planning -- and maybe having a little extra to set aside.
Many in the Wells Fargo study who said they are confident in their ability to retire were defined as affluent, meaning they have more than $250,000 in investable assets. Overall, 88 percent of affluent survey respondents said they are confident in their ability to retire, compared to 57 percent of those with less than $250,000 in investable assets.
While it may be easier for affluent workers to save for retirement because of their extra income, the survey claims that the planning affluent workers use may also be a major factor in their confidence. These tactics include creating a written plan for finances in retirement and developing detailed plans and calculations to determine the amount of money they will need.
Fortunately, though, many of the tactics used by the affluent to plan can be used by workers of every income and asset level. So if those incentives to save from the government haven't worked, drafting a detailed retirement plan may be the next logical step for savers.