April was Financial Literacy Month, which led to a flurry of articles about the retirement crisis in the U.S. One piece noted that the “average” retirement savings amount, paltry though it is, is often an overstated figure because it is the average (i.e. mean) rather than the mid-point (i.e. median) and therefore overstates the “average” savings level. It indicated that although the “average American” has about $200,000 in retirement savings, the median is $59,000. This means the savings crisis is even worse than advertised.
As a society, we need to think and act differently if we are going to solve the retirement crisis in the U.S. Children are not taught financial literacy in school, and yet we expect them to navigate the confusing world of investments as adults and save enough to fund their own retirement. Parents, who also often have insufficient experience in these matters, are usually the only people to teach this life skill to their children, if their children get any education subject on this at all. To make matters worse, many parents set bad examples.
How can we fix this broken cycle? To help future generations, we must empower our children, starting at a young age, so that they grow up to become super savers. How can we motivate a 20-something, who is earning an entry-level wage in a high-cost-of-living region like the San Francisco Bay Area, to focus on saving for retirement when many have little extra cash to save, no experience with investing, more immediate financial goals, and nobody to guide them through the process?
Make it a goal to become a “super saver,” which opens up your options later in life. The younger you start, the better, especially young people just beginning their careers, but it’s never too early or late to improve your future. Young professionals can get a jump on becoming a super-saver by participating smartly in their 401(k) plans.
What is a super saver?
A “super saver ” is someone who saves a significant percentage of her, his or their income, typically 20% or more. Super savers prioritize saving and investing over housing and day-to-day expenses. They are willing to sacrifice something in their current living standard because they are motivated by the goal of financial independence later. A survey conducted by The Harris Poll on behalf of TD Ameritrade examined the financial behaviors of these aggressive savers and found that more than half of all super savers started investing before age 30.
Super savers open up a world of opportunities. They can often retire young, and/or take a mid-career break to enjoy more time with families before their children leave home. They have the luxury of making a mid-life career change and reducing their income in order to do so. They are in a position to do more philanthropically to support the causes that they care about, and they can travel more while they are young and healthy enough to enjoy it. They have a robust safety net in case of unforeseen setbacks, such as extended unemployment or medical costs. And because a stronger financial situation decreases stress, it can also decrease illness and medical costs.
The message is simple: the earlier you start saving, the easier it will be to achieve financial freedom. When you save enough, early enough (and you invest prudently for an appropriate rate of return at each life stage), you give yourself enough time to let the power of compounding work its magic. Start later, and you will either have to save more each year or work more years, or spend less in retirement – potentially dramatically less.
Make it a habit starting now to “pay yourself first” …save for your retirement so that it is an automatic part of what you do, like paying for food, clothes, housing, and other fundamentals. This mindset is the key to success – you can’t rely on luck to change your financial circumstances. Rather, it is achievable with discipline.
To zero consumer debt and super saving
Here is a real life success story… A young woman was ready to set herself on a different financial path. She described her childhood – her parents regularly hid from creditors, moved the family due to evictions, and declared bankruptcy. She, however, wanted a different life. She wanted to be responsible about saving and investing and was ready to work towards her own financial freedom. With good 401k education and support, she transformed her life. She left her high-cost one-bedroom apartment and took on roommates, cutting her housing cost by more than half. She sold her car and converted to public transit. These lifestyle changes allowed her to pay off her student loans aggressively. Within two years, she had paid off her debt and was saving significantly into her company’s 401(k) Plan. Now she is in her 30s and on track with her retirement savings. She has become a “super saver” and the joy she feels about heading in the right direction is huge.
5 simple lessons to learn and teach
How can you help groom the future super savers of America? Whether you’re preparing for your own future, and/or you’re a parent preparing your children to eventually launch into their independent lives, or you have co-workers trying to prepare for their futures, you can start by sharing and teaching simple lessons such as:
- Aim: Set your saving goals. How much will you need to retire? How big should your emergency fund be? A person who sets goals is more likely to attain those goals.
- Save: Pay yourself first: Before you choose how much to pay for housing, start saving the right amount for retirement as soon as you enter the workforce and do not stop. A good rule of thumb is to save 15% of your pay, always.
- Invest: Use an appropriate stock/bond mix according to your life stage, think long term and be a disciplined investor (not an emotional investor). Know that the stock market goes up and down over time. Do not fear the downturns. Expend far less energy on concerns about market fluctuation and far more energy on saving enough.
- Focus on the right risks: Under-saving, inflation and emotional investing are more damaging than market volatility (market volatility has a reward over time, for disciplined investors).
- Be smart with debt: Good debt can help you grow your wealth; bad debt erodes it. Know the difference.
- Spend wisely: Know how much you can spend now, within your means, and enough to enjoy life, while also saving enough to spend what you need in retirement. In retirement, determine how much to spend without running out of money before you run out of years.
In other words, super savers Aim, Save, Invest (and spend) wisely. Do it for yourself. Then pass it on. By doing so, let’s all collectively start to overcome the national retirement crisis.
WealthStep’s online tools (launching soon), are designed to help you Aim, Save, Invest and Spend wisely… i.e. become a super-saver. WealthStep’s video education will also help.