Characterizing themselves as disciplined and financially savvy, over three-quarters of Americans in a recent survey claim to be good savers. In reality what they are good at saving, is the actual act of putting money away for retirement. That they are saving for another day.
“Too many people have a false sense of confidence and an inflated sense of preparedness,” says Brian Perlman, a partner with Mathew Greenwald & Associates, which conducted the Retirement Reality Check survey for financial firm Allstate.
The source of this confidence is baffling. While respondents view saving as important, and harbor financial fears regarding their old age — like not being able to afford health care and outliving their money — their retirement account balances lag. Over half report less than $50,000 squirreled away for retirement. Worse, isolating just the Baby Boomers, found only 18 percent with account balances exceeding $250,000, a level indicating a serious attempt at eventually financing retirement.
Yet, the upbeat respondents seemed defensive when accused of underachieving. The implied message to surveyors was: Back off, at least we put something away.
Perlman thinks part of the disconnect between confidence and balances arises from focusing on the willingness to take a few strides in the right direction rather than on goals. “It’s like they are running a race without regard for the finish line. Instead, they’re measuring their performance by how far they’ve run, or more accurately how far they felt like running,” says Perlman.
Taking a realistic look at the finish line is universally regarded as the first step to achieving retirement goals. But it requires calculating how much is needed given specific financial situations and expectations. While any financial advisor can do this — with varying degrees of complexity, accuracy and often for a fee — a quick click to Choose to Save offers a sneak peek at what the finish line looks like, or at least what neighborhood it is in.
The second step in retirement planning, involves taking a deep breath.
“The key after realizing how far you have to go is not shutting down, deciding it is hopeless and walking away. Instead, breathe in and start developing plans for closing the shortfall,” says Perlman.
So what can underachieving savers do today to improve the lives they will be leading tomorrow?
Make saving automatic. It hurts less.
“We are in the midst of benefits enrollment season,” observes Ryan Jantzen, a registered representative for Allstate Financial Services LLC, in Folsom, CA. “Participate or raise contributions to employer-sponsored plans at least to the amount that qualifies for full [company] matching. Otherwise, it is just leaving money on the table,” advises Jantzen. Maxing out these plans remains advisable for most savers.
Similarly, banks and mutual funds are perfectly willing to set up direct deposit programs, regularly transferring money from checking accounts into IRAs, savings or investment accounts. It’s a way of treating savings like any other expense by direct billing oneself for retirement each month. Low-cost online firms like ShareBuilder can also help put even modest deposits to work immediately and routinely.
Another painless direct deposit option is the U.S. Treasury’s online program, TreasuryDirect. A few clicks can set up an automatic fee-free savings plan involving high-grade investments, free of state income taxes, some even providing a direct hedge against inflation.
For many, finding the money to do all this requires neither heroics nor hard budgeting decisions. Often, the money is there. It just needs freeing up.
Marc Thomas, a certified financial planner with Lesjak Planning in Westlake, Ohio, fingers mortgages as a prime area for found money. “There are still an awful lot of people who would benefit from refinancing. It can free up a couple hundred dollars a month for a savings program,” he says.
Another area: Insurance policies. The cost of term life insurance in particular has been declining, according to Thomas. Looking for a better deal could similarly free up funds for monthly saving.
William Driscoll, a certified financial planner with Driscoll Financial in Plymouth, Mass., suggests looking at homeowner- and auto-insurance policies: “Most people’s coverage is too good. Their deductibles are way too low.” He estimates raising them could free up as much as $200 a month for many policyholders.
Traditional penny-pinching methods are tried and true, because they work. From emptying out loose change from purses and pockets at the end of the week and adding them to the proverbial “jar” — to depositing rebates, tax refunds, or any other unexpected “windfalls” —banking them rather than spending them creates little trickles of savings. It adds up.
So do the rebates offered by programs like NestEggz and Bond Rewards. Purchases made with their affiliated vendors accumulate credits toward U.S. Savings Bonds. It’s a good way to make spending, especially ahead of the holidays, contribute to the retirement fund. Add a cash rebate credit card to the mix, and the payback could be that much higher.
As actions, these hardly qualify as high finance, but all address savings shortfalls today. Waiting for tomorrow — for the big raise or an inheritance from the estate of a long lost uncle, or some other external windfall to materialize — as the surveyed ‘savers’ reportedly are doing, is a highly flawed plan. Tomorrow never comes. But one way or another, retirement will.