the conventional wisdom on this is wrong in the United States. What's the conventional wisdom, you ask? Well, the herd (we'll have more on who that is and why they tend to miss what's really going on later) view is that all these people struggling to pay off student loans are young people, primarily recent college graduates.
They're not.
A report by the New York Federal Reserve showed that in 2012, the last year for which there are records, 4.7 million people who owe money on student loans are between the ages of 50 and 59. Perhaps more of a surprise – 2.2 million are age 60 and older!
Is it hard to fathom then that 40 percent of Americans past the age of 45 said they had thought “only a little” or “not at all” about financial planning for retirement? No – lest you think we are making it up, that was revealed in a 2014 Federal Reserve Board study.
According to the OECD (Organization for Economic Co-Operation and Development), the ratio of household debt to income in the Eurozone has gone from 77.2 percent in 2002 to 97 percent in 2013. In Italy, this ratio has risen from 37.7 percent to 65.8 percent in 2012; but that isn't nearly as bad as in Spain where debt has gone from 79.3 percent of household income to 122.9 percent by 2012. In the United States, in 2000 this same ratio was about 90 percent. It peaked at 133.6 percent in the fourth quarter of 2007 (no surprise, given all those crazy 0-percent-down mortgages being handed out left and right, coupled with the home equity credit lines that became ATMs for many) but has improved to now be about 108 percent by 2015.
Figure 1.1 Total liabilities to disposable income4 ratio for households and nonprofit organizations
For argument's sake, let's say that you've been a diligent person and you're socking some of your after-tax dollars every month as best you can, to chip away at that looming cost.
If at this point you understand that you will need to invest to ensure you meet your financial goals, you can skip to Chapter 2; just be sure to check the summary located at the end of this chapter.
State of Savings in the United States
If you are a data lover like us and want to know more about just how startlingly dire the situation may become, read on. We really geek out on the stats in this next section.
Congratulations!
We say that because saving money is a good thing, despite what the elected officials in Washington, D.C., would have you believe in our consumer-driven economy. How often have you heard how we need to get consumers spending? It's as if the key to a successful economy is to spend every dime you make, and then borrow some more! As thrilled as we are that you are taking steps forward, the reality is if that's all you are doing, then you have a much tougher road ahead of you – and one you may not see the end of.
There are two other big concerns that most people face. One is being able to afford the level of care required as you get older. According to a Harris Poll, nearly three quarters (74 percent) of respondents said they worry about having enough money to retire and two-thirds (67 percent) of respondents said they worry about being able to afford unexpected healthcare costs.5 Among those who are not yet retired, 7 in 10 worry about being able to pay for their healthcare costs when they retire. And worried is exactly what the findings of Age Wave, a think tank that specializes on aging, say you should do, because out-of-pocket healthcare costs in retirement may equal $318,800 if retirement lasts 30 years; $220,600 for 25 years; $146,400 for 20 years; $91,200 for 15 years; $50,900 for 10 years. And in case you were wondering, these estimates do not include the cost of long-term care.
And that brings us to the next big concern – the really big concern – having enough saved and invested to actually retire. Three-quarters of U.S. adults who are not yet retired say they worry about having enough money to retire, and 70 percent say planning for retirement is a key priority to them. One thing those still in the workforce are not planning to use is Social Security – only about a third say they have faith in Social Security being there when they retire. If you have such concerns, or even if you don't, we would suggest you point your web browser at USDebtClock.org to better understand the country's mounting debt and how much is attributed to entitlements such as Medicare, Medicaid, and Social Security. Perhaps Social Security will be around when you retire, but we would hate for you to be banking on that only to find out the program was significantly altered when it was your turn to collect.
Pundits say you will need 60 to 85 percent of your gross household income today to sustain the same lifestyle after you retire. A different perspective from Fidelity Investments says that, depending on factors such as your ability to save, your starting age to save, and retirement age, you'll need eight times your ending salary. Data from Sentier Research recently pegged average household income at $53,891; for reference, that is still 4.8 percent lower than it was at the start of the Great Recession in December 2007. If your ending salary was in that range, then at minimum you would need another $430,000 on top of the amount you would need to fund education needs and healthcare concerns. Odds are, however, that would not be enough given the impact of inflation, which saps the purchasing power of your saved dollars. If you are the sole breadwinner in the family, that means eight times your ending salary needs to be stretched even further – perhaps you need to be saving more than you think?
This is hardly an outrageous thought when you consider that these figures are the averages. Depending on your current lifestyle or the one you aspire to have, it could mean needing far more than that. For others who are earning below the median income, and per data from the Social Security Administration, roughly 50 percent of American wage earners fall into that camp, while 47 million receive food stamps and 47 million live in poverty, it means having to close an even bigger gap.
We've already mentioned inflation and how it cuts into purchasing power. Ask any retired person living on a fixed income how much beef they've been eating over the last year or two, given the more than 50 percent increase in beef prices! The same goes for the other parts of the protein complex: pork, chicken, dairy products, coffee, and more. As the standard of living improves across the globe, it means there will be more mouths looking for the same foods that you've enjoyed. Not a bad thing (do you really think others should not be allowed to enjoy chocolate or a nice cup of coffee in the morning?), but simple laws of supply and demand tell us that if global demand is climbing past a certain point, then supply is constrained and prices will rise. This is particularly true of the more complex proteins like beef. It takes a lot of feed to produce just one pound of beef versus the relatively smaller amounts required to produce one pound of fish.
Another easy factor to observe is that we are simply living longer lives.
If you don't see that when you are out and about in your daily lives – well we've got some data to share with you. According to a report from the Stanford Center on Longevity (SCL), in 1950 a 65-year-old man could expect to live to age 78, or an additional 13 years. By 2010, a man age 65 could expect to live to age 82, or 17 years longer. A woman age 65 in 1950 could expect to live another 15 years, to age 80, but by 2010 her life expectancy was 84.
The same report shows that the average length of retirement in 1950 was 8 years for men, increasing to 19 years by 2010. This is due to the combination of earlier retirement ages and longer life expectancies. (There are no comparable figures for women, since women didn't enter the paid workforce in substantial numbers until the 1970s.)
Another SCL report shows that the percentage of older employees in the workforce is back on the upswing. In 1950, 45 percent of men age 65 and older were still working. This percentage declined to about 15 percent by 1990, but increased slowly to about 22 percent by 2010. (It's worth noting that this figure encompasses all men over age 65, including men in their 80s and 90s. The percentages of men working in their late 60s and early 70s are much higher.)
Another important difference between then and now is that in 1950, retirement hadn't yet been glamorized by the media as the “golden years,” an extended period of travel and