If you think you have plenty of time before you have to worry about saving for retirement, you are probably underestimating how big a job it is. The following are five hard facts that make retirement saving challenging, especially in today's world:
1. Interest rates are still below normal
Earning interest is one way to build retirement savings, but interest rates remain well below normal and thus are not in a position to give you much help.
Take 10-year Treasury yields as an example. Over the past 50 years, these yields have averaged 6.46 percent, ranging between a high of 15.32 percent reached in September of 1981 to a low of 1.50 percent reached in July of 2016. As of January 2018, these yields had recovered moderately to 2.58 percent -- still well below their long-term average and much closer to the low end of the range than the top.
Even if interest rates return to more normal levels, it would be a mixed blessing. While it would provide immediate improvement to savings account rates, rising rates tend to create a headwind for stock and bond returns. This could hamper the more growth-oriented portion of your retirement savings.
What to do about low interest rates:
Use conservative return assumptions in your long-term retirement planning, and shop actively for the best savings account rates and CD rates to squeeze all you can out of this interest-rate environment.
2. Inflation is poised to eat more of your savings
Inflation has averaged 4.1 percent a year over the past 50 years and, while it has been much quieter in recent years, lately it has returned to its old ways. Over the six months through January of 2018, inflation was running at the same 4.1 percent annual pace it averaged over the past half century.
At 4.1 percent a year, inflation would double costs in just over 17 years. This means a 45-year-old today would likely see things cost twice as much before reaching retirement age, and four times as much by end of life.
What to do about inflation:
Make a healthy allowance for inflation in your retirement savings target. Dollar amounts that seem huge today won't be so impressive when you are paying prices in retirement that are two to four times what you pay today.
3. A long life is a costly blessing
"Long life" is a well-meaning blessing, but it carries a cost. A long life means more years of retirement to fund.
According to the CDC, the typical 65-year-old can expect to live 19.1 more years. That represents nearly two decades of retirement expenses to meet and, since roughly half the population lives longer than this average, it could be even more.
How to plan for a long life:
Set retirement targets that not only account for your probable lifespan, but also the possibility you might live longer than expected.
4. Elder care is very expensive
A dangerous financial planning assumption is that spending decreases in retirement. This depends greatly on your circumstances; and if you need special help, you might find that costs accelerate sharply.
According to Genworth Financial, assisted living costs in the United States average $45,000 a year, and a semi-private room in a nursing home averages $85,775. Expect these costs to increase over time.
How to plan for elder care:
Careful planning and a commitment to savings are the best way to meet challenges like this. Also, consider these costs when choosing a place to retire, since these expenses vary widely from state to state.
5. Social Security is only part of the answer
Social Security is helpful, but don't expect it to come anywhere near close to providing for all your retirement needs. According to the Social Security Administration, the average retiree in 2018 will receive a total of $16,848 in benefits for the year.
When you think about your living expenses now, or the elder care costs described above, it is clear that Social Security alone is not the answer.
What to do about Social Security:
View Social Security as a supplement, but not even the main source of your retirement funding. The primary responsibility for your retirement is not on the government or on your employer, but on you.
Don't be put off by these challenges. Time can be both an enemy and an ally. The time you spend in retirement will require years of funding that has to keep pace with inflation. On the other hand, an early start will give your retirement savings more years to accumulate and grow through investment. Starting now is the way to put time on your side.