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We fall short on saving for retirement

Have you lookat at your 401(k) balance lately?

If you have, you may be pleased to see the year-to-date return on your portfolio. The broader markets (Dow Jones Industrial Average, S&P 500 and NASDAQ) have all returned between 22 percent and 34 percent so far this year—and hopefully this means your 401(k) balance has risen as well.

While seeing positive returns will make us feel good about the growth of our retirement dollars, the amount we have saved (or balances) and what we spend it on in retirement are really more important—and this is where American investors are falling short.

According to a recent survey by the nonpartisan Employee Benefit Research Institute (EBRI), the average 401(k) balance in the United States is $94,482. This average covers a wide span of ages, but one can dive deeper and see the average balances for someone in their 40’s, 50’s and 60’s are $83,690, $129,508 and $135,008, respectfully.

So if you are in one of the age groups, and your 401(k) balance is in this range, are you in good shape? This is a question millions of future retiree ask themselves on a daily basis—and the answer is “it depends.”

Many investment companies offer access to financial models and tools that try to help consumers estimate how much retirement savings they will need to live comfortably upon retirement. One investment firm even uses the slogan “what’s your number” to tout the retirement calculator provided on its website.

While these websites might be able to provide a nice estimate to investors, they often fall short of helping investors with the one of the most important aspects of retirement—managing budgets and controlling expenses in retirement.

Managing expenses in retirement has never been more important. Today, most retirees need to worry about mortgage payments, healthcare expenses and end-of-life expenses including assisted living and nursing home expenses. While workers in their 20’s, 30’s and 40’s may not think of these expenses, workers in their 50’s and 60’s gain more of an appreciation for them, and recent data has shown an interesting trend.

Another recent survey by EBRI showed that since 1991, investors have become increasingly pessimistic about their ability to retire before turning 64-years-old. In 1991, 50 percent of investors believed they would be able to retire by age 64. Here in 2013, only 23 percent of investors believe they can retire by age of 64.

More startling, however, is the fact that 26 percent of investors thought they would have to work into their 70’s—and 7 percent of investors thought they would never be able to retire.

What has changed between 1991 and 2013 to cause investor sentiment to change so dramatically? There are many hypotheses to explain this shift in investor thinking, but one worthy of consideration is that while investors may be good at saving for retirement, some struggle with how they manage their budgets after they retire.

Budgets are a required foundation for individuals of all ages. While budgets are important for individuals in their 20’s and 30’s as one saves for house down payments, new cars and other goals, they are also important for individuals in their 60’s, 70’s—but for a different reason. The goal for this older population is to stretch their retirement nest egg so that it can last as long as possible.

So what do retirees spend their retirement savings on? EBRI estimates that consumers over the age of 50 spend between 40-45 percent of their budget on home and home related items. From a healthcare perspective, health expenses increase to 20 percent of the budget for those ages 85 and over, and long-term care and private insurance coverage have a significant impact on spending by older households as well.

To help cope with these increasing expenses, many retirees look to downsize their home, reduce spending on luxury items and impulse buying, and cut back on eating out at restaurants.

These budgetary suggestions are sometimes tough for retirees to swallow, and it is easy to understand why. We all believe that we want to work hard so that we can enjoy retirement—and not necessarily have to worry about penny-pinching. With the help of a financial planner, retirees can put together a manageable budget that will allow them to not only plan for increasing expenses, but also enjoy retirement as well.


This is one in a series of columns by University of Mary Washington College of Business faculty on various aspects of finance and economics as they affect our readers. Rob Strassheim is an adjunct instructor and vice president of business operations for Dickinson + Associates.

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