How Americans Can Overcome our Retirement Crisis

The following is a guest post from Clint Haynes, a Certified Financial Planner® from Kansas City, Missouri.

If you still think that your future Social Security check is enough to live off for retirement, think again.

Like Canada, maybe even more so, America is in the middle of a retirement crisis. Results from several studies and surveys paint a very bleak picture of what’s awaiting retirees in the next few decades.

Case in point, the Social Security trustees’ 2018 annual report predicts that Social Security Combined Trust Fund Reserves will be depleted by 2034. Now, this doesn’t mean Social Security goes away, but it does mean that if nothing changes, your social security check will be taking a haircut.

This seems to align with another prediction I read recently by Ric Edelman, founder of Edelman Financial Services—claiming that there will be “An economic crisis for millions of retirees of unprecedented proportion.” He says that in 14 years, current Social Security benefits will be cut by as much as 23 percent across the board based on current retirement laws.

Here’s what that means: If you’re a retiree receiving a $1,200 monthly check from Social Security, the government will cut it down to just $900. With that big of a loss, people won’t be able to afford other necessities, such as housing, food, and medicine.

And, if that wasn’t bad enough…if you take a look at the following U.S. retirement stats and figures, you’ll realize how grave this retirement crisis is:

Americans who do not make contributions to an employer-sponsored 401k (similar to Canadians’ RRSP given it involves tax-deferred growth): 57%

Americans near retirement age with less than $25,000 savings: Almost 50%

Shocking numbers in some cases. But all is not lost. Here is how some Americans can help overcome their retirement crisis.

1. Have a strategy for retirement

The first step is to come up with a general retirement game plan. Getting started can be the hardest part. I suggest you identify your preferred means of building up assets for retirement (401k, savings accounts, etc.,) and focus on making whatever contributions you can – even saving as little as $25 or $50 per month can go a long-ways over time. After contributions to accounts are made, then you can determine the right asset allocation and any smart tax planning strategies to make the most out of your savings.

2. Make the most out of Social Security

Did you know that working until your full retirement age (FRA) will increase your monthly payouts from Social Security? A person born in 1955 who starts claiming benefits at 62 will receive 26% less versus what he/she could’ve received at age 66. This is why most financial experts advise that you don’t file for benefits until you’ve at least reached FRA.

Here’s another tip: Work for at least 35 years. The reason? The government calculates your monthly benefits by getting the average of your salaries from your 35 top-paying years. In the U.S., this average is adjusted for inflation. So, if you worked less than 35 years, the calculation will include those years when you had zero income-resulting in significantly less monthly payouts.

Knowing that your monthly checks will be based on how much you’ll earn on those 35 years, it pays that you maximize your earnings as much as you can. Perhaps you can get a part-time job, ask for a raise, or even do some side gigs to increase your annual earnings. Any combination of these will help.

3. Build up your 401k

If your employer provides a traditional 401k plan, take advantage of it! The tax advantages alone should be enough of a reason to participate. But if you need more convincing, here’s what you’ll miss out on if you decide not to participate in any employer-sponsored 401k plan:

Matching employer contributions and profit sharing (essentially free money)

Ability to contribute as long as you’re working

Creditor protection (401k is ERISA-qualified, which means they are often protected from judgment creditors)

ROTH 401k (after-tax contribution)

Ability to make catch up contributions (if you’re 50 and older)

And, maybe you’ll even get to retire earlier or at least closer to when you want!

The bottom line? I think it would be a big mistake not to participate in a 401k plan. It’s one of your main tools for overcoming the retirement crisis.

4. Open an IRA

Both traditional and Roth IRAs can be excellent ways of building your retirement nest egg. Traditional IRAs allow tax-deferred growth for contributions of up to $5,500 ($6,500 if you’re over 50) while Roth IRAs can offer you tax-free qualified withdrawals including earnings after you turn 59 ½. The idea here is to take advantage of as many options available that focuses on building your assets over time.

5. Lockdown your retirement savings

What I mean here is maintaining discipline when building your retirement funds. For example, not taking a loan against your 401k (unless you really, really need it) and making sure you’re increasing your contributions if you can on an annual basis. It also includes taking advantage of available tools to automate and track your savings.

In today’s FOMO-driven (Fear of Missing Out) society, it’s too easy to fall into the trap of buying the latest stuff and gadgets simply because everyone’s doing it. However, successful investors are usually the ones who have the discipline to ward off this “I gotta have it!” mentality. They channel their savings into investments to build their assets exponentially.

Case in point: Warren Buffet is one of the richest men in the world yet he still lives in the same house and almost never buys new cars. I’ve read his breakfast does not even go beyond $3.17. And this is a man who is worth tens of billions of dollars. The lesson? Be disciplined with your money; know needs from wants and divert some savings towards investments to maximize growth over time.

6. Consider hiring a Certified Financial Planner®

You probably knew this pitch was coming but you know what, I’ll state the obvious: getting some fee-only planning advice might help you out.

I can’t speak for Canada but here are some things U.S. CFPs can help investors with:

Help organize your finances; determine the strategy for retirement I highlighted above.

Help you with decisions for reaching your financial goals faster; discuss the proper accounts and investments that align with your plan.

Be your resource for questions regarding retirement accounts, insurance, taxes, and more.

You can certainly do all this work yourself, as a DIY investor like Mark, but experience tells me some folks need this type of help from time to time.

7. Create other income streams for retirement

Building (and maintaining) multiple income streams is an excellent way to boost your retirement income. Here are some of my ideas I talk to clients about beyond Social Security checks:

Consider owning some dividend-paying stocks – adding these to your portfolio is a great way to earn some income from your portfolio. Some U.S. companies actually have a very good track record of continually increasing their dividends on an annual basis.

Consider fixed or deferred annuities – adding these to your income stable can help provide-like income (you are allocating some money now in exchange for a future income stream).

Own a rental property – this isn’t for everyone since I wouldn’t want to encourage debt but you can consider using some of the income to pay off the costs associated with your house. Maybe you can consider renting our spare rooms, i.e. Airbnb, for some extra money.

Regardless of how you choose to overcome the retirement crisis, you do have options and Americans would serve themselves well to consider them. What’s most important, though, is Americans need to implement at least a few of these options – take action. The days of relying on just Social Security and a pension from your company are long gone. It’s now up to you to take control of your retirement destiny.

Thanks Mark for allowing me to get my messages out – I hope America listens!

This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. Clint recently found My Own Advisor and has been a big fan of the content ever since.