We haven’t even gotten through this crisis yet, and we have another one on the way? Seriously?
That’s what John Bogle–the founder of Vanguard and the creator of the first index fund–would have us believe. And, distressingly enough, the case he makes is pretty convincing.
Last month, Bogle testified before the House of Representatives about the upcoming crisis of failed retirements. His testimony included a number of noteworthy statistics:
We’re not saving enough
The median IRA balance is just $55,000, and the median 401k balance is just $15,000. Sure, if you’re in your twenties or thirties, having $70,000 saved up is excellent. But given that the largest portion of the investing community is the baby boom generation (who are now retired or retiring soon), $70,000 is nowhere near enough.
In short, most people simply aren’t saving enough. In fact, they’re not even close.
An asset allocation nightmare
One of the best things about 401k plans is that we’re allowed some options in terms of how we want to invest our money. Unfortunately (and perhaps unsurprisingly), a significant portion of investors are making rather poor decisions:
Nearly 20% of investors in their twenties have literally zero exposure to equities (stocks) in their 401k. In other words, they’re invested entirely in bonds and money market funds. With no access to the long-term growth provided by equities, it’s practically impossible for an investor to accumulate the money necessary to retire.
At the other extreme, more than 30% of investors in their sixties have greater than 80% of their 401k invested in equities. Such a high equity exposure is dangerous for somebody so close to retirement. I can only imagine how these investors are feeling after the last year in the market.
Delayed gratification? No thanks.
When changing jobs, 60% of all 401k participants cash out at least a portion of their 401k and use it on something other than saving for retirement. Not only are these investors hampering their ability to achieve long-term growth, they’re subjecting themselves to an extra 10% tax that comes with early withdrawals from retirement plans.
Apparently we just can’t wait to spend our money.
What can we do?
You and I aren’t John Bogle. We don’t have a free ticket to speak to the U.S. House of Representatives anytime we want, so we’re unlikely to play a major role in any system-wide investment industry changes. That’s the bad news.
The good news is that we can certainly make efforts to ensure that we don’t become a part of this mess.
- Check your asset allocation. Make sure it’s in line with your age, your goals, and how much you’re going to be able to invest each year.
- Make sure you’re saving enough. In the past, finance experts tended to recommend investing 10% of your gross income. In recent decades, that number seems to have jumped to 15% as a result of longer average retirements and increased late-in-life medical bills.
- Get used to the idea of delayed gratification. Money in your 401k is not meant to be spent before you retire. No exceptions.
What about you? What retirement-savings pitfalls are you taking extra care to avoid? And what are you doing to avoid them?
About the author: Mike writes at The Oblivious Investor, where he reminds readers that long-term investing success has nothing to do with short-term fluctuations in the market. Subscribe to his blog for daily updates.
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They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.
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I can say that in my 20’s and 30’s I cashed in my retirement fund … twice. Oops.
Paying the price now.
I’m now getting more proactive and will be choosing stocks myself rather than mutual funds.
This seems to be saying that people avoid stocks when they’re young, and then learn about their value as they grow older and try to get something out of it before it’s too late – unfortunately this is the opposite of what they need.
The individual perspective and values that need to change before individual wealth accumulation can occur can be summed up with the Keynesian idea that “the marginal propensity to consume exceeds the marginal propensity to save”. Most do not understand their own behavior along the economic dimension of: “friviolus consumption”, “necessry consumption”, “depreciating asset”, “apreciating asset”, “apreciating asset that generates income”.
Personally, understanding this was the first step, followed by due diligence and persiverance. I think that Marci has the “bigger picture” … you go girl ;~)
“In recent decades, that number seems to have jumped to 15% as a result of longer average retirements and increased late-in-life medical bills.” – This shows the ‘increasing’ awareness among investors.. Good article. Thanks Mike…
marci: I think you were extremely smart in allocating your resources and net worth but I’m sure most American retirees only have their 401k and IRAs as their retirement. I can only wish to have a pension when I retire but it looks like I will only have my own investments and savings to live off by the time I’m ready to kick back and relax.
It would be great if I get social security by then but I would never assume that I will get anything (even though I’m paying for it which never made sense to me, even when I was young and didn’t know that I won’t get anything back).
The biggest retirement problems are Social Security and Medicare. All the money is gone. The government is getting deeper in debt. There is no way that they will be able to pay. Most wanna-be retirees completely ignore this.
Hi Marci.
Sounds like you’re doing very well–quite the model for many of us to look up to.
I suspect, however, that your degree of preparedness puts you in the minority.
As to how much of most people’s assets are held in retirement accounts: According to the Investment Company Institute, about 40% of household net worth was invested in retirement accounts on average.
I don’t have statistics on the other 60%, but I’d imagine a significant portion of it is home value.
I don’t think the ‘experts’ are looking at the whole picture if they are only looking at the totals in the 401K and IRA accounts. For me, at 55, those 401K and IRA accounts are a small portion of my investments (20%), and and even smaller portion of my net worth (10%). I have a small pension already coming in, and a PERS account waiting to be tapped at any time, plus all the interest and dividends from the investment account, plus property contracts coming in, plus real estate I’m sitting on, plus a few other things.
So why would the ‘experts” think that I had all my retirement into 401K and IRA’s? I never put all my eggs in one basket. Yet I am financially ready for retirement, except for that health insurance piece of the pie.
Hi Nate.
To the best of my knowledge, to invest in a hedge fund you have to be an “Accredited Investor,” meaning you have to have either $1 million in net worth or $200k annual income.
Though admittedly, I haven’t looked greatly into hedge fund investing, so there might be some way around this that I’m not aware of.
I have hardly even begun my savings (I have all of $1,000 saved), but, when I do start saving, I plan on looking into investing into a hedge fund. Precious metals are an excellent hedge fund. If the money is inflated, gold and silver stay the same value, so you never loose anything. [Disclaimer: This is not financial advice. 🙂 ]
Thanks,
Nate