Many Americans have no clue
A Yahoo! Finance article had the following headline: Over 40% of Americans don't know how much they'll need for retirement. The article drew on a national study by a financial planning platform that found 4 in 10 people (ages 25 to 75) have never tried to calculate what retirement will cost. The article goes on to list possible reasons, including managing high expenses, not knowing where to start, too much debt, information overload, and thinking there’s always time to do it later. While some of those are valid reasons, I think it goes back to our early adult years and not learning that we're solely responsible for making sure retirement is paid for. In other words, if we were taught (or taught ourselves) about our lifetime responsibility to manage money, we would know it is up to us to figure out that retirement answer (or pay someone to answer it for us). The reason 40% of Americans don’t know how much they’ll need for retirement isn’t just that they never calculated the retirement number; it’s that they probably lack understanding in many other areas of money management.
In my case, I was interested enough as a young adult to teach myself about money and investing, and as a result I had a lifetime of personal financial success. But I imagine there are many who bounce from one money decision or crisis to another, maybe learning a lesson or two along the way but otherwise ignoring the big money discussions that are needed. Just getting through the month with a positive number on the bank statement is good enough. As I say in the introduction to Volume 1 of “What Would Dad Do?”, we all start somewhere. That somewhere is younger or older, high or low income; it doesn’t matter. We all have a starting point for taking full responsibility for our finances. So, don’t read something like the Yahoo! article mentioned and then find the answer to calculating your retirement number without tackling how much life insurance you need, whether your emergency savings are enough, or whether your budget for the year is complete.
Of course, the financial planning industry, including retirement account providers, banks, brokerages, and paid financial advisors, all want your attention, so you'll seek their help answering the “how much do I need?” question. They have thrived since the introduction of the 401(k) in the 1980s, collecting fees along the way as government rules and investment products grew more complex. So it’s understandable that many are overwhelmed and end up thinking, “I’ll save what I can and figure it out later.” And, in my opinion, the government also fails to educate the public about the limited role Social Security will play in funding all of retirement, including old age, adding to the reasons we're in this predicament.
If you’re reading this as one of the 4 in 10 who haven’t calculated what you’ll need for retirement, let me suggest 3 actions: First, download the FREE Rough Retirement Savings Calculator here, then spend an hour reviewing the instructions and example, and entering your own numbers. It’s pretty simple. It’s based on the concept that you must replace a percentage of your final work income at the start of your retirement years. The reason it’s a “rough” calculation is that what really matters in retirement planning is estimating your spending first, then translating that spending into the amount of savings needed to provide that income throughout your entire retirement. Therefore, the next step would be a more comprehensive plan, but the rough estimate is a starting point.
If you are shocked by the amount of savings the Rough Retirement Savings calculator estimates you’ll need, complete action #2. Either purchase the Retirement Checkpoint tool here to build a retirement savings plan, or use your 401(k) provider's website and planning tools. Other major financial services providers also offer retirement savings calculators for you to try. Finally, for the third action, if you sense you’re not managing your retirement money well, it’s never too late to learn and do better. In Volume 3 of “What Would Dad Do?” I specifically included a chapter titled "Finding a Smaller Hill for Retirement" because I wanted to show examples of how one can recover from a late start and end up with a better retirement. All three of the “What Would Dad Do?” books provide the financial education everyone should have but probably didn’t get.
The last comment I'll make about the 4 in 10 statistic might have already dawned on you. A 25- or 30-year-old doesn't really need to calculate a retirement number. They need to start saving at least 10%, but doing an estimate for 30 or 40 years in the future isn't worth the effort. Now, a 40- to 55-year-old definitely needs to calculate a more accurate retirement number, as there is still time to save and get prepared for retirement. By age 65+, it's too late, and you'll just make do with what you have. Proper retirement preparation isn't that difficult and can be done by yourself, with assistance from your financial services provider or a hired financial planner, depending on your needs. The most important thing is not to delay and think there will always be time to do it later, because the loss of time is also the loss of compound growth.
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