How Americans Can Overcome our Retirement Crisis
The following is a guest post from Clint Haynes, a Certified Financial Planner® from Kansas City, Missouri.
If you still think that your future Social Security check is enough to live off for retirement, think again.
Like Canada, maybe even more so, America is in the middle of a retirement crisis. Results from several studies and surveys paint a very bleak picture of what’s awaiting retirees in the next few decades.
Case in point, the Social Security trustees’ 2018 annual report predicts that Social Security Combined Trust Fund Reserves will be depleted by 2034. Now, this doesn’t mean Social Security goes away, but it does mean that if nothing changes, your social security check will be taking a haircut.
This seems to align with another prediction I read recently by Ric Edelman, founder of Edelman Financial Services—claiming that there will be “An economic crisis for millions of retirees of unprecedented proportion.” He says that in 14 years, current Social Security benefits will be cut by as much as 23 percent across the board based on current retirement laws.
Here’s what that means: If you’re a retiree receiving a $1,200 monthly check from Social Security, the government will cut it down to just $900. With that big of a loss, people won’t be able to afford other necessities, such as housing, food, and medicine.
And, if that wasn’t bad enough…if you take a look at the following U.S. retirement stats and figures, you’ll realize how grave this retirement crisis is:
- Americans who do not make contributions to an employer-sponsored 401k (similar to Canadians’ RRSP given it involves tax-deferred growth): 57%
- Americans near retirement age with less than $25,000 savings: Almost 50%
Shocking numbers in some cases. But all is not lost. Here is how some Americans can help overcome their retirement crisis.
1. Have a strategy for retirement
The first step is to come up with a general retirement game plan. Getting started can be the hardest part. I suggest you identify your preferred means of building up assets for retirement (401k, savings accounts, etc.,) and focus on making whatever contributions you can – even saving as little as $25 or $50 per month can go a long-ways over time. After contributions to accounts are made, then you can determine the right asset allocation and any smart tax planning strategies to make the most out of your savings.
2. Make the most out of Social Security
Did you know that working until your full retirement age (FRA) will increase your monthly payouts from Social Security? A person born in 1955 who starts claiming benefits at 62 will receive 26% less versus what he/she could’ve received at age 66. This is why most financial experts advise that you don’t file for benefits until you’ve at least reached FRA.
Here’s another tip: Work for at least 35 years. The reason? The government calculates your monthly benefits by getting the average of your salaries from your 35 top-paying years. In the U.S., this average is adjusted for inflation. So, if you worked less than 35 years, the calculation will include those years when you had zero income-resulting in significantly less monthly payouts.
Knowing that your monthly checks will be based on how much you’ll earn on those 35 years, it pays that you maximize your earnings as much as you can. Perhaps you can get a part-time job, ask for a raise, or even do some side gigs to increase your annual earnings. Any combination of these will help.
3. Build up your 401k
If your employer provides a traditional 401k plan, take advantage of it! The tax advantages alone should be enough of a reason to participate. But if you need more convincing, here’s what you’ll miss out on if you decide not to participate in any employer-sponsored 401k plan:
- Matching employer contributions and profit sharing (essentially free money)
- Ability to contribute as long as you’re working
- Creditor protection (401k is ERISA-qualified, which means they are often protected from judgment creditors)
- ROTH 401k (after-tax contribution)
- Ability to make catch up contributions (if you’re 50 and older)
- And, maybe you’ll even get to retire earlier or at least closer to when you want!
The bottom line? I think it would be a big mistake not to participate in a 401k plan. It’s one of your main tools for overcoming the retirement crisis.
4. Open an IRA
Both traditional and Roth IRAs can be excellent ways of building your retirement nest egg. Traditional IRAs allow tax-deferred growth for contributions of up to $5,500 ($6,500 if you’re over 50) while Roth IRAs can offer you tax-free qualified withdrawals including earnings after you turn 59 ½. The idea here is to take advantage of as many options available that focuses on building your assets over time.
5. Lockdown your retirement savings
What I mean here is maintaining discipline when building your retirement funds. For example, not taking a loan against your 401k (unless you really, really need it) and making sure you’re increasing your contributions if you can on an annual basis. It also includes taking advantage of available tools to automate and track your savings.
In today’s FOMO-driven (Fear of Missing Out) society, it’s too easy to fall into the trap of buying the latest stuff and gadgets simply because everyone’s doing it. However, successful investors are usually the ones who have the discipline to ward off this “I gotta have it!” mentality. They channel their savings into investments to build their assets exponentially.
Case in point: Warren Buffet is one of the richest men in the world yet he still lives in the same house and almost never buys new cars. I’ve read his breakfast does not even go beyond $3.17. And this is a man who is worth tens of billions of dollars. The lesson? Be disciplined with your money; know needs from wants and divert some savings towards investments to maximize growth over time.
6. Consider hiring a Certified Financial Planner®
You probably knew this pitch was coming but you know what, I’ll state the obvious: getting some fee-only planning advice might help you out.
I can’t speak for Canada but here are some things U.S. CFPs can help investors with:
- Help organize your finances; determine the strategy for retirement I highlighted above.
- Help you with decisions for reaching your financial goals faster; discuss the proper accounts and investments that align with your plan.
- Be your resource for questions regarding retirement accounts, insurance, taxes, and more.
You can certainly do all this work yourself, as a DIY investor like Mark, but experience tells me some folks need this type of help from time to time.
7. Create other income streams for retirement
Building (and maintaining) multiple income streams is an excellent way to boost your retirement income. Here are some of my ideas I talk to clients about beyond Social Security checks:
- Consider owning some dividend-paying stocks – adding these to your portfolio is a great way to earn some income from your portfolio. Some U.S. companies actually have a very good track record of continually increasing their dividends on an annual basis.
- Consider fixed or deferred annuities – adding these to your income stable can help provide-like income (you are allocating some money now in exchange for a future income stream).
- Own a rental property – this isn’t for everyone since I wouldn’t want to encourage debt but you can consider using some of the income to pay off the costs associated with your house. Maybe you can consider renting our spare rooms, i.e. Airbnb, for some extra money.
Regardless of how you choose to overcome the retirement crisis, you do have options and Americans would serve themselves well to consider them. What’s most important, though, is Americans need to implement at least a few of these options – take action. The days of relying on just Social Security and a pension from your company are long gone. It’s now up to you to take control of your retirement destiny.
Thanks Mark for allowing me to get my messages out – I hope America listens!
This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. Clint recently found My Own Advisor and has been a big fan of the content ever since.
It’s interesting to have this post/links to get some insight into how our American cousins are doing in regarding retirement savings and with available social progams. There was some sound advice offered, however there were some concerning points about so many having so little for retirement.
“The CPPIB (Canada Pension Plan Investment Board) Your CPP has about 80% of their investment in the US and only about 11% in Canada…. what does that tell you.”
Respectfuly, it tells me your homework isn’t correct.
Their philosophy on where and what they invest in is also explained there. Basically they look for best opportunities globally to avoid an over reliance on our countries more limited capital markets and economy. The overall investment breakdown for regions/countries in perecent is:
Asia Pacific 20.4
Gr Britain 5.6
Latin America 3.5
I agree with some of your points although I wonder why such a wealthy country has so many citizens with so little savings, why social security (evidently critical to many) is expected to be dramatically cut, if as you suggest the country can abundantly hike taxes? If I’m not mistaken the recent corporate tax cuts appears to be deficit financed.
That’s why I didn’t mind posting Clint’s article when he pitched it to me. It was interesting to hear how a CFP from the U.S. might begin to help others…
As for the U.S. personal savings, I can’t imagine how stressed I would be if I only had $25k in savings for retirement.
As a ex pat American who fully expects to receive Social Security and Canadian CPP I don’t have a doom and gloom perspective.
The US dollar is the worlds fiat currency and will be for the foreseeable future. China lacks transparency and rule of law and poses no threat to US economic dominance. The US unique position allows for generous debt and deficit positions not afforded to any other nation.
Personal tax rates have room to rise should this be necessary, whereas in Europe and countries like Canada you are at the upper limits. Many states have no income tax or extremely low property tax. Not the most desirable solution but the ability to raise revenues is abundant.
All Western countries are undergoing an issue with aging population, the average American is younger than say the average Canadian and Canada being 3% of the worlds GDP isn’t screaming the sky is falling.
The CPPIB (Canada Pension Plan Investment Board) Your CPP has about 80% of their investment in the US and only about 11% in Canada…. what does that tell you.
Rich, China is the holder of U.S debt for a reason as well – they believe in the economic prosperity of the U.S. long-term. That’s a good thing. On the other hand, I believe the U.S. Social Security program is in a world of hurt.
I don’t think you are correct on CPPIB. Never say never, but as a Canadian, nobody should put 80% of their assets in the U.S. market.
I agree that many states have no income tax but that doesn’t mean that’s a good thing. 🙂
“- Consider fixed or deferred annuities – adding these to your income stable can help provide-like income (you are allocating some money now in exchange for a future income stream).
– Own a rental property – this isn’t for everyone since I wouldn’t want to encourage debt but you can consider using some of the income to pay off the costs associated with your house. Maybe you can consider renting our spare rooms, i.e. Airbnb, for some extra money.”
I missed these two comments as they differ from the opinion that many Americans have not saved for their retirement. If they have enough money to buy annuities or rental properties than they have enough to do the first recommendation:
-“Consider owning some dividend-paying stocks – adding these to your portfolio is a great way to earn some income from your portfolio. Some U.S. companies actually have a very good track record of continually increasing their dividends on an annual basis.”
Annuities don’t increase the income over time and rental properties tie up capital, generating little income.
I can see where Clint is coming from re: annuities – but I wouldn’t buy one myself until my 70s or 80s. Even then, it depends on my fixed income needs. I’ve always found these products are great for the insurer, maybe not so much for the investor.
I think a rental income property could work for many investors, you can always sell the property for a gain. Hopefully a gain but no investment is guaranteed.
As you know, I prefer income-generating ETFs or dividend paying stocks.
I thought the Social Security was funded out of General Revenue, which is deeply in debt. They just keep printing money to cover the deficits.
Sad but true that many, especially seniors or those close to becoming have not saved enough for their retirement. Sound advice, and yes saving as little $25 or $50 a month is a good start. Get it into the TFSA and invest for Income. Trying to invest for Growth (like Cannabis stocks) may backfire and what little gain could quickly be lost. Stick with fairly secure dividends and steady growth.
No you don’t need a Financial Planner, just read this and other blogs and DIY!
My understanding is U.S. Social Security is paid for/funded by payroll taxes – by employers and employees. The combination of both funds security cheques.
Unless the U.S. government changes their contribution formula, I’ve read articles that say the fund might be depleted by 2034 or 2035. That would be like our OAS being dead. Not good.