It has been written that many working Americans will tend to struggle financially during retirement. Many people don’t understand how money works, which causes them to make poor financial decisions. These reasons include, but are not limited to the notion that low wage earners will never be financially secure and that most Americans have never taken the time to calculate how much money they will need to save for retirement nor have met with a professional advisor to help them with the calculation.
We will first talk about the notion that low wage earners will never be financially secure and finally why it’s important to seek advice from a professional when making financial decisions.
Americans tend to have a different mindset than other nations do when it comes to saving money. Joe Dominguez and Vicki Ruben wrote in, Your money or Your Life, that the thought of saving money has almost become un-America. They say that the savings rate in America was a mere 4.5 percent in 1990 and as low as 4.1 percent in 1988. However, in 1973 Americans saved an average of 8.6 percent of their net disposable income. Net disposable income is defined as the amount of money that is left over after all the bills are paid. The lower the monthly bills are, the higher the amount of money you will have available to save.
They added that by comparison, the Japanese save over 15 percent of their net disposable income. This equates to over 3 times the percentage that people in America save. Whether a person earns $20,000 or $200,000 a year, the important thing is to adopt a healthier mindset toward money. One similar to that of the Japanese. If Americans started saving 15 percent of their net disposal income there would be a greater chance of seeing savings accounts grow to higher levels. A way to increase the amount of net disposable income is by establishing a budget that covers the basic necessities of life such as transportation, housing, food and clothing. This should be the foundation of their financial plan. Regardless of income anyone can become more financially secure when they adopt this plan and low wage earners will improve their chances of being financially secure.
In the 2014 Retirement Confidence Survey conducted by The Employee Benefit Research Institute 56% of the Americans surveyed say that they have never attempted to calculate how much money they will need to save in order to live comfortably in retirement. Ongoing expenses that will continue after retirement include utilities, property taxes for home owners, health and wellness, transportation, groceries, clothing and insurance. The key is planning ahead. Money experts have estimated that it can take as much as 70 percent of the pre-retirement income to maintain the same standard of living after retirement. This figure shoots up to 90 percent for low wage earners according to the US Dept of Labor. Again, the key to a secure retirement is to plan ahead.
Few seek financial advice while even fewer take it.
The 2014 Retirement Confidence Survey states that roughly 80 percent of the American workforce and another 75 percent of retirees reported that they did not obtain professional advice for their investments. Professional advice is defined as advice that is paid for either by fees or through commissions. This is perhaps the greatest contributor to the reason that so many of the working Americans tend to struggle financially during their retirement years. 27% of the workers that obtained financial advice from a professional say they followed all of the advice given to them, but only 36% followed most of the advice while only 29% followed some of the advice. Retirees are more likely to report the highest percentage at 38% of the advice they received from a financial professional.
What are the results of person investing in their retirement savings without a professional guiding them? Here is a real life example. Robert Shively was retired from the petroleum industry, living his dream. In an article from Time Magazine, Stephen Gandel tells us how Shively started putting money back into his company’s pension plan. His company converted the plan into the more popular 401k style plan. The result of this change made a dramatic impact on Shively’s monthly income. If his money would have remained in the pension plan we would have received $1,308 a month for being a salaried employee. Instead he receives $225 a month as an hourly employee, plus $180.16 a month from a profit-sharing plan while having a remaining balance of $70,000 from his 401k plan. If Shively would have worked with a professional financial planner he would have learned alternative methods of creating additional cash flow during retirement and lived more comfortably.
Patrick Kelley shares in his book ,The Retirement Miracle, that since the stock market is volatile, one should consider the fixed equity index annuity as a personal pension plan. This strategy acts as a hedge fund that will protect the gains to the account and eliminate losses. The life insurance industry offers a variety of products but the theory is simple. The fixed equity index annuity fixed index annuity does not decrease when the stock market drops while earning money in the years the market experiences gains. This first illustration shows what will happen when a traditional stock market account experiences an increase and decrease of 10% each year over a 10 year period.
If the individual starts with a $1,000 balance you will notice that after 10 yrs the stock market account balance is $950.99. Compare that to the second chart. During the same period of time the annuity account grew but never experiences a loss. The balance at the end of the 10 year period is $1,610.51.
People that do not seek the advice of a professional adviser are unaware of this strategy and would experience a $659.52 shortfall. That’s equates to lower net worth of 59% compared to the individual that sought professional advice.
It has been said that Americans will have to work longer and start retirement much later in life because they don’t have enough money to live on. When low wage earners understand that financial security can be experienced for when they decide to calculate how much money they will need for retirement along with getting advice from a qualified financial planner, they will struggle less in their retirement years.