It should not come as a surprise that people with lower incomes have lower levels of retirement savings. However, many people with lower incomes have no retirement savings at all – and a recent Federal Reserve report suggests that far too many Americans across all age groups fall into that category.
The Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2016 found that 56.4% of Americans making less than $40,000 per year have no retirement savings. This includes defined benefit plans (traditional pensions), defined contribution plans such as 401(k) plans or IRAs, or liquid accounts (cash, CDs, etc.) that could be devoted to retirement.
Younger respondents making less than $40,000 annually were more likely to have no retirement savings. Just over 60% of lower-income respondents below age forty reported having no retirement savings – an unfortunate statistic because saving for retirement at an early age allows you to benefit from the magic of compound interest.
Lack of retirement savings is prevalent among all ages of low-income Americans, even those nearing retirement age. A shocking 42.7% of lower-income respondents age sixty or older have no retirement savings at all, making them completely dependent on Social Security. These respondents will likely need to put off retirement to maximize their benefits, which increase 8% annually for every year you delay benefits beyond your full retirement age until age seventy.
Even respondents with retirement accounts are tempted to borrow from those accounts or cash them out entirely. The survey found that 13% of non-retired respondents with retirement accounts had either borrowed from their retirement funds or cashed them out completely within the last twelve months – likely incurring early withdrawal fees as well as not compounding on those withdrawn assets.
Leisa Peterson, Certified Financial Planner® and Life Coach at WealthClinic®, points out that while it may be necessary to withdraw from retirement accounts for valid reasons such as paying off debt, she suggests that "you need to be very, very cautious...are you going to sleep better at night because you've done that? And at the same time, if you do it, then now you need to make a really high priority to restore that savings back into your retirement account." Peterson's advice is especially pertinent to lower-income Americans.
Granted, retirement savings is very difficult at the lower end of the earnings spectrum, but it's even more important because of Social Security benefits. Your benefits are based on a formula that incorporates your top 35 years of earnings. The average monthly Social Security benefit is $1,342, and if you spend many years at $40,000 or below – well below the $48,098 that served as the national average wage index for 2015 according to the Social Security Administration – your benefits will be significantly below average.
How do you start a retirement savings fund? Create a budget that sets aside a certain amount automatically for retirement, and then stick to that budget. If your employer offers a 401(k) with matching contributions, adjust your budget to take advantage of it to the extent you can afford – otherwise you are basically refusing free money.
Even putting aside a small amount regularly helps, because you establish savings as a habit. After a while, you will have adjusted your spending to the point where you don't even think about your retirement savings as a burden cutting into your discretionary income.
If you are among the 56.4% of lower-income Americans that do not have any retirement savings, we urge you to start today. Even if you are approaching retirement age, it is not too late. Every dollar that you save now lessens your burden in retirement – and you have better things to do in retirement than constantly worry about your income.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.