The Cost of ‘Not Yet’ Saving for Retirement

Retirement feels like a lifetime away when you are in your 20s, but that is exactly when you should start thinking about your golden years. As an investor, the long haul is the greatest advantage one can have to a more comfortable retirement than someone who waits until their 30s or 40s to start saving.

According to a recent study by Edward Jones, almost half (45%) of non-retired Americans are not currently saving for retirement. Of those who are not yet saving, only 36% plan to do so in the future and almost 10% say they never plan on saving for retirement

The study, which interviewed more than 1,000 non-retired and retired Americans, also found reoccurring patterns in different age groups among those who have not yet started saving

“When it comes to retirement savings, there’s a big difference between planning to save and actually doing so," said Scott Thoma, Principal and Investment Strategist for Edward Jones. "While intentions to save for retirement are legitimate, individuals tend to satisfy more immediate, short-term spending goals and push off their long-term saving goals.”

Thoma discussed with me additional findings from the survey and advised that one’s most valuable asset for saving is “time”: 

Boomer: What did the study find to be the most critical decades for retirement savings and why?

Thoma: This question could be viewed through a few perspectives, and each decade has importance.  In all age groups, nearly 90% stated they planned to save for retirement.

The youngest age group (18-34 – let's refer to them as the 20s) had high expectations of saving early – nearly 90% planned to begin saving by the time they reached their 30s. However, only 36% had already started. The next age group, the 35-44 year-olds, only 49% had started saving, but 31% planned to start saving in their 40s. Thus, you see a pattern, in each age group, nearly all have plans to save, but they have plans to save in the future – plans that for many do not come true. In fact, if they hadn't begun saving by their late 40s, they didn’t save for retirement at all. To us, the biggest issue is this illusion of time, along with competing goals, and you see this across the decades.

For the earliest group, the "20s" retirement can seem like such a long way away, it may be easier to delay saving and instead spend and focus on the present. Retirement savings is important, but "I have time." In the 30s, I still feel it is important, but now I have other competing goals – perhaps a new family and children, and a similar phrase is uttered – "I need to save for retirement, but I'll start saving later." Unfortunately, later either never comes, or it comes much later. Time can be a friend or a foe. The biggest asset many young individuals have is time, and many unfortunately waste this asset. Just take some simple math and the Rule of 72. If you think about money potentially doubling every 10 years (assuming a 7% rate of return), delaying by 10 years removes one of those "doubles" and it is the last double that you lose, which is the most valuable (i.e. First double may be $5,000 going to $10,000; last double may be $250,000 going to $500,000 or $500,000 to $1m).

Boomer: How does household size and children influence retirement savings?

Thoma: We saw results that appear to support the conclusion above, that many plan to save, but as additional financial demands arise, households delay retirement savings for other items. For example, only 39% of respondents in single person households indicated that they are not currently saving, compared to 51% of respondents with a household size of three or more. Similarly, 58% of respondents with no children have already started saving. We understand that having children does present additional financial challenges, but it is still important to understand the tradeoffs they may be making if they delay their own retirement savings, and what options they may have. For example, many young families are paying day care expenses, which could easily cost $800 to $1,000 a month. Some or all of this money could be reallocated to retirement and education savings once the child enters school.

Boomer: What did the study learn from respondents who were already retired?

Thoma: About 70% had saved, similar to what we found in the late 40s and 50s. Some still had plans for saving (less than 10%), but the majority of those that had not already saved, when they reached retirement, had no plans of saving.

Boomer: What was the biggest problem causing Americans to stop or not save at all? Is there a fix for that?

Thoma: This was not explicitly asked in the survey, but we can draw some conclusions based upon the pattern we witnessed (desire to save, but delaying – fewer families saving vs. singles), that points to some of our statements above. The big one is certainly the illusion of time. Many also don't understand how little steps can make a big difference. For example, the average tax refund is about $3,000/yr. Investing this, every year over 30 years with a 7% return, could be $300,000 over 30 years.

There also seems to be inertia – just a problem with getting started. This is why steps such as auto-enrollment in employer-savings plans is important, automatically building a habit of savings. We recommend that, even for those that are working on paying down debt, to at least contribute enough to achieve the company match, and then focus on items such as paying down debt.

Another key step is to clearly show the benefit of investing over time, and perhaps the risks of not investing. Younger individuals in particular may have seen the market performance over the past decade, and may instead be holding money in cash and not investing. While there are risks to investing, there are also risks to not investing, namely not earning the return necessary to reach your goals.

Finally, retirement can seem like such a big challenge, so many put it off because it seems intimidating. We see the potential excuse for not saving change from "I have no time" to "I'm too far behind," but they really don’t have any facts to back up either excuse. We need to empower individuals and highlight that they can get there – they just need to start today. By actually sitting down with a financial advisor and understanding where they are, where they want to be, and what their options are, now they can actually have information that can help them get to retirement, and the tradeoffs they may need to consider to help get them there.