Why is retirement so distant to many Americans?
Once upon a time, part of the American dream was to work hard for one company for many years, get the decent pension after retiring in their late 50s or early 60s, and enjoy their golden years. Now this pretty picture is gone. I guess the word “pension” is probably going to disappear from the dictionary very soon. The reality is very bleak.
Social Security is totally a mess:
Just for our readers out of US, Social Security (abbreviated as SS) is a government program in US. When having a job, you pay in the rate of 6.2%, and your employer contributes the same amount. That’s the payroll tax. This huge amount of money goes to a big pool of US government, or I would say a big dark hole. You don’t have any say how the money should be managed or invested, when you can retire, and how much you can get. Uncle Sam just orders each of us keep throwing the money in.
In the past, I got a letter every year from the SS Administration. They told me that, the SS fund was going to run out in 15 or 20 years, whatever. I was just baffled. Why do they keep sending me the same miserable message? Do they want me to fix it? Sure, let’s stop the whole program, and refund to every contributor. It looks they are not capable of managing the money. Then just cancel the program. Let people manage their own money, period. I can manage that 12.4% of my pay much much better.
Now they know it’s a problem, then do the job and try to fix it. Or isn’t that their job? Each administration is just sitting there, getting paid nicely, letting it explode and our money wasted, and doing nothing. It’s frustrating to taxpayers. Now they stopped sending me that lovely letter, as everyone can access online.
Many people heavily depend on Social Security. It’s going to be a big wake up call at the time near retirement. Suddenly they will realize the SS income is too low to cover all of the living expenses. Whoops. That would be a very sad surprise.
The age to get 100% of the SS benefit used to be 65, now is pushed to 67. Who knows if they are going to postpone it to 70 someday? Or just say forget about SS benefit.
Americans have not saved enough:
Unfortunately many Americans have not saved enough for retirement. Some even have not saved anything. According to CNBC, the average retirement savings for American families between the age 56 and 61 is $163,577. The median number for the same age range is only $17,000. The 2nd number reflects the clear reality. It means that, half of them have less than $17,000 saved, and half have more than $17,000 saved. This kind of saving is not going to last 30 years, for sure, my fellow Americans.
The number is not surprising. Many people around are living paycheck by paycheck. They work so hard, and some work even two or three jobs. For some reason, they just can’t save. What goes wrong?
- The income is low, and the expenses are high:
The wages have been stagnant for decades. The current federal minimum wage is $7.25/hour. Many people are still making the minimum wage. It is very hard to get by, especially in those expensive cities. I remember that, back in early 1997, the minimum wage was raised from $4.25 to $4.75/hour. It was a huge deal to me, as I was a graduate student making the minimum wage then. 50 cents was 11.7% raise. Wow, I was smiling for days.
Housing cost has way exceeded the inflation and wage growth in many places. Here we are talking about not only the house purchase price, but also the property tax, insurance, and maintenance. Rent keeps going up as well. People spent bigger and bigger percentage of the income on the houses every year. The house appreciation in some places is nice. But if you don’t sell it, you don’t feel the gain in your pocket.
College education cost is way out of control. It’s just becoming unaffordable even for public schools. For a family with 3 or 4 kids, the college bills are so daunting.
After paying all those expenses, at the end of each month, many people simply don’t have much left. Some would feel lucky without incurring more debt. Do they want to save for retirement? Sure. But the means are just not there.
- Financial literacy, discipline and spending habit:
Yeah, the income is hard to control, unless people get more training or education, switch majors or jobs or locations, or try to get promotions. But in terms of spending, people have plenty of leeway. This is the part each individual can do and change.
Expenses are like a sponge. You have to squeeze it, very hard. Differentiate the needs from wants, and focus on the needs. I need a place to live, and a reliable car to go to work. But a 4000 square feet house and a Lexus? That’s not my needs at all.
I don’t see much course offered in the local public school about financial literacy. The school might offer Economics, but that’s mainly about the macro economy. Kids need to learn how money works, how to save and manage money, what is interest compounding, What is investing, what are stocks and mutual funds, etc. If the school is lacking the course, we as parents should step up, and help kids develop the skills.
Some might ask: what happens if the parents don’t have the knowledge? Well, grab a good book from the library, and start learning it. It’s not hard, just needs time to sit down, and understand the stuff. It’s good for the parents, and great for the kids.
Having the knowledge is not enough. The key is to take actions. Take a hard look at each of the expense items, and ask yourself: is this a need or want? Can I get rid of it? If not, can I reduce the dollar amount by going to a cheaper store, or selecting a cheaper brand? How much interest or fees have I paid to the financial institutions this month? How to reduce or eliminate them one by one? The tax season is coming up soon. How do I use the tax refund if any? That’s not free money. That is your money Uncle Sam took from your pocket earlier. Don’t spend it. Save it.
It is always hard to change the spending habit. It requires discipline. But it has to be done in order to plug those money leaks, and save money for retirement. Many times, it does not necessarily mean lowering the quality of life. It only means to use the money wisely and consciously, and avoid wasting your hard-earned money. Saving is the first step, but saving only is not enough. You have to invest it properly. That’s another topic I’m going to cover later this month.
In summary, the retirement could still be within your reach. It’s up to you to make the changes, and let the money work for you. Have you saved enough for your retirement? If not, hurry up!
Take a look at my eBook, a mini-memoir on Amazon: “DAD’S BICYCLE: Journey of A Chinese Family”.