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Most Americans Underestimate Their Retirement Needs – How To Fix It

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Why do so many Americans underestimate how much they need for retirement?

A bevy of reasons, spanning human cognitive biases, the legacy (and fallout) of private pension plan dissolution, and how financially literate we are all play a role.

Read through to the end for the good news:  knowing how much to save for retirement isn’t as complicated as you might think.

A Long, Long Time Ago, A Stable Future

A long, long time ago in a galaxy far, far away, a generation of professionals launched careers.

With a glint in their eye, a paycheck that went considerably farther than paychecks do today, non-existent student loan to repay, and likely the promise of a private pension to fund retirement, these professionals were made unique promises.

Although this required a major pledge of loyalty, many in the workforce in the 1970s were happy to pledge their talents and energies to one organization in exchange for that stable future.

But, as pension programs were dismantled by private corporations in the interim decades,  the responsibility for retirement planning shifted quietly and gradually to individuals and away from corporations.  

To say Americans were inadequately prepared for that responsibility is an understatement.

More troublingly, retirement planning continues to confound the majority of us while wage growth is stagnant. Financial security and the notion of a carefree senior lifestyle are alarmingly elusive.

We Struggle with Financial Concepts (And We’re Ashamed About It)

Financial Literacy

It’s tough to know when to save, how to save, how much to save, and so on if you don’t really understand the nuts-and-bolts basics of money.

And yet, for all our access to information 24/7, America is currently ranked #14 for financial literacy in the world.  

That means we struggled with answering these questions:

  1. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
  2. Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?
  3. Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back: 105 US dollars or 100 US dollars plus three percent?
  4. Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?

→ Pro Tip:   Check out Broke Millennial for no-nonsense general advice about finances. (I also recommend following her on Twitter.)

How We Feel About Money

Financial literacy is a huge yet invisible issue which shapes how we interact with money and, by extension, how we approach long-term savingsIf you wonder about questions related to your finances, you’re hardly alone. 

Not that you’d know it.

People are so embarrassed by what they don’t know about money that there’s an entire field developing to help with it: financial therapy.

This field is emerging at the intersection of clinical psychology, social work, family economics, and finance.

The goal, in a nutshell, is to help people understand their relationship with money based on past experiences (e.g., how your parents handled money), expectations and meaning (e.g., money represents power or freedom), and the ways those things impact daily habits (e.g., spending and saving). 

Shame is a powerful motivator of behavior. What’s fascinating is that most of us are walking around with the same secret.

What if you could find a way to make it less scary with your friends? A thought to ponder, friends.

Humans Are Irrational with Money

Perceived Value and Immediacy

I’d bet $1 that you’ve heard of the Stanford Marshmallow Experiment. It’s a famous psychological experiment which looks at how children respond to delayed gratification.

In short, kids were given marshmallows as a reward and different experimental conditions looked at whether a bigger reward or a more immediate reward would be more attractive.

The big finding was that kids were willing to give up a bigger reward for a more immediate reward.  

Sounds a little like spending  chunk of your tax refund this month versus adding it to your emergency fund.

Actually seeing the money hit your bank account and then go out into savings is a huge psychological barrier you may not be aware of; remove it.

This is precisely why experts recommend automating “paying yourself first,” so it’s like the money you’re saving was never in your pocket to begin with.

It turns out, there are lots of examples like this in our everyday behavior that thwart our own efforts to save.

Behavioral Finance 101

Traditional economic theory goes something like this:

  • “People behave rationally with money and make consumer decisions based on all available information being weighed equally and dispassionately.”

Modern economic theory is finding, however, that humans aren’t so rational after all. A new field, called Behavioral Finance, is emerging as a result. Its founding observations could be summarized more like this:

  • “Emotion, context, and circumstances are unbelievably important in shaping financial decision-making.”  

Traditionally, economists assumed $1 is $1 is $1, regardless of where you’re spending it or how you came into possession of that $1.

Under those assumptions, we’d expect you to spend $1 just as freely on a charitable cause at the grocery store checkout as, let’s say, $1 for a charitable contribution in an app you must pay to download on your smartphone. 

Most people are hesitant to spend the same $1 for an app in the Google Play or iTunes store but not think twice about adding $1 (ore more) to their grocery bill for a good cause. That’s not logical. (Now do you hear Spok?) 

→ Pro Tip:  To learn more about your own biases that are working against your efforts to save or pay off debt or meet other financial goals, check out Predictably Irrational.

$1,000,000 Sounds Like Plenty of Cash, Right?

It’s estimated most Americans will need well over $1 million to retire comfortably. Compare that with the data on what people actually have socked away and you might be rather alarmed.  

Retirement savings for families headed by those age 50 to 55 is roughly ten percent of that amount, or just $125,000.

Some research suggests millennials are doing alright, keeping pace in the ballpark of $15,000 to $45,000 saved for our golden years.

Think about how much money one million dollars seems like. (Did you just picture Dr. Evil saying that? I did. How can you not?)

Okay, but seriously picture having to live off of that for 40 years. Different ball game, right?  In some places, that will barely put a roof over your head for a few years!

So How Much Do You Need?


I’m a sucker for a great online calculator tool and there are no shortage of great retirement planning calculators.

These tools are great because they do all the heavy lifting in the calculations for you. Note there are typically several “assumptions” built in (e.g., years until retirement, annual savings rate you’re planning, and so on). 

Here are a few of my favorites:

  1. Vanguard Retirement Calculator
  2. MSN Money Retirement Calculator
  3. CNN Money Retirement Calculator
  4. BankRate Retirement Calculator

Basic Math

Another simple shortcut to figuring out about where you should be is the industry’s rule of thumb. Per Fidelity Investments, that goes something like this:

  • Try to save at least 1x your salary by the time you’re age 30
  • 3x by 40
  • 6x by 50
  • 8x by 60
  • 10x at 67

There is more good news as we wrap up.  Figuring out how much you need to save is probably a pretty straightforward exercise, especially with the help of a handy calculator like ones above.

Keep in mind that executing is probably far easier than you realized.

Investing Should Be Boring (Ask Warren Buffet)

The idea that investing is complex is, in part, driven by the shame and avoidance people experience because they’re embarrassed by what they don’t know.

But there’s the thing. Passive investing is better for nearly all investors.

For a long time, the American public at large was told investing is ultra complex because financial services providers made their money through actively trading stocks and managing portfolios to try and beat the market.

In other words, the more complicated they made it, the more the earned in commissions. In doing this, they secured a career for themselves being trusted advisors and confidants.

But, today, savvy savers and investors like you know better.

And today, savvy financial advisors are serving as fiduciaries to their clients and providing a more holistic financial wellness service approach to their clients instead of selling, well, products they may or may not actually need (in order to make a commission).

→ Pro Tip:  Make like Warren Buffet and adopt a boring index fund approach to growing your nest egg. Then let it hang out and do its thing while you live life.

Think Outside the (Workplace 401K) Box

Consider a Roth IRA

The major difference between a Roth IRA and a Traditional 401K sponsored by your employer is whether you’re paying taxes now or later on your retirement savings contributions.

  • Roth IRA:  pay now
  • Traditional 401K: pay later

The argument you’ll see often is that younger earners are typically in a very low tax bracket as they are just starting their careers.

While this is often true, the other immediate factor in many young adults’ lives right now as they launch career is the crushing debt we’re facing.

That can be a very real barrier to plowing piles of cash into a supplementary IRA account, but it’s well worth looking into.

→ Pro Tip:  If you are in a low tax bracket, another option worth investigating is converting a traditional 401K into a Roth.

Let Robots Help

Technology is reshaping how we save and invest.

The constant opportunities to automate more facets of our financial lives means we are in the driver’s seat of our financial destinies more than our  parents ever could have imagined they’d be.

Have you ever asked your parents what they knew about investing at your age? It isn’t an exaggeration to guess you could probably learn everything they did in 20 years or more in less than a day. Thanks, Google!

Today, apps like Acorn  and others are making it easier than ever to invest as a beginner.

Most allow you to automatically contribute funds on a recurring basis and heavily automate diversification and investing activities which traditionally required far more manual effort.  Each has a slightly different approach.

Acorns offers electronically-traded funds (ETF) driven by algorithms, each with well over 5,000 stocks and bonds each.

Opening an account requires just a few dollars and comes with a $5 bonus for signing up.

The fee structure for apps like Acorns tends to be rather straightforward, either being a percentage of your assets being managed by the app or a flat dollar amount.

Final Thoughts

Knowledge is power! Okay, sorry, I couldn’t help myself. When it comes to financial literacy, there’s no shortcut for learning about money, yourself, and what it all means for your future. 

Let’s recap:

  1. A great place to start your journey into learning is with the financial literacy survey to see how you score.
  2. There are endless resources available, including the National Endowment for Financial Education (NEFE). When it comes to learning about money, look for reputable sources and research.
  3. Then, take a deep breath, crunch the numbers in one of the awesome calculators in the article or just do the basic multiplication problem following the rule of thumb. Plug in the numbers in the calculator to see if your passive investing is on-track to get you in the right ballpark for retirement. As a bonus to making Warren Buffet proud, your boring passive investing strategy for growing your retirement nest egg is also a great way to side step psychological traps associated with bad investing behavior like buying high, selling low.
  4. To learn more about the irrational decisions you’re unfortunately prone to as a human (no matter how smart or good-looking you are), pick up Predictably Irrational from Amazon.
  5. If you need a little help from a financial pro, seek out a fiduciary; they’ll put your best interests ahead of their own as a matter of a professional ethical oath they’ve sworn (not all advisors do that, so you have to ask if they’ve taken the fiduciary oath!).
  6. Last stop:  level up your retirement planning by considering a Roth IRA addition or conversion!
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