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Home » Money Matters

Underprepared and Overconfident

Submitted by on November 12, 2005 – 10:13 am No Comment

Too many people are living in the dark when it comes to financial matters, and their futures are bleaker than they realize. The annual Retirement Confidence Survey offers some depressing — and surprising — statistics.
By Selena Maranjian (TMF Selena)
November 11, 2005

Things are often not what they appear to be. Take that couple you envy so much — the ones who live next door with the Lexus and the wide-screen high-definition TV. They might be deep in debt. They might even be contemplating bankruptcy (though it’s now more difficult to do, thanks to tougher rules). You might imagine that your buddy at work, who wears fancy suits and has two kids on the honor roll at a good school, has a stock portfolio brimming with all of the companies you wish you’d have invested in. Believe it or not, though, your buddy may have little or no money invested in stocks at all, and perhaps he just lost a bundle on Refco.

Want to peek into the financial lives of your loved ones and other fellow Americans? Look no further than the annual Retirement Confidence Survey, sponsored by the Employee Benefit Research Institute, the American Savings Education Council, and Mathew Greenwald & Associates.

The facts
Here are some shocking statistics from the survey revealing that far too many people are thinking way too incorrectly or insufficiently about financial matters. Consider sending this article to people you care about who aren’t tending their financial gardens — it may be a wake-up call for which they thank you years from now. (Just click on the “Email this Page” link at the bottom of this page.)

Most workers (55%) find themselves behind schedule in their retirement savings. Why? The cost of everyday expenses (49%), child-rearing expenses (39%), and medical costs (35%). Some 51% of workers find that high costs are keeping them from saving for retirement as they want to do.
To this, permit me to suggest another cause: procrastination. Thinking about and dealing with retirement issues is just not so appealing to many of us. It’s easy to wince and put it off. Don’t do it, though. You need to tend to your retirement now. That’s why we offer an inexpensive monthly newsletter to help. Easy to read in a single sitting and chock full of inspiration and practical advice, Rule Your Retirement is well worth trying — for free.)

Just 42% of surveyed workers have bothered to try to figure out how much money they will need in retirement. Of this subset that has tried, 35% consulted a financial advisor, 37% came up with its own estimate, and 10% “simply guessed”!
Oh dear. I can imagine the survey designers tossing in the “I guessed” option at the last minute, just in case it represented a notable portion of respondents, and then being shocked that one in 10 people have done just that.

This is a big, big deal. Your retirement can last a third of your life, or more. It’s a time when your income is typically lower than you’re used to. And since that income is fixed, with no performance bonuses, you’ve got to be careful in order to make ends meet. Yet very few people have any plan for how they’ll get by. They’ve underprepared, have simply guessed about their needs, and are behind schedule. This is a recipe for disaster.

Some 66% of workers believe that they’ll reach their retirement goals on time.
That looks like a good statistic, right? But it’s probably not. It’s most likely just discouraging evidence that too many people are deluding themselves. If they’re behind schedule, how are they going to turn things around? Will their medical costs go down? I doubt it.

Fully 79% of workers expect to have “at least an adequate standard of living in retirement.”
Again, one has to wonder where all this confidence is coming from. Even if you’re invested in some terrific companies, such as eBay (Nasdaq: EBAY) or Dell (Nasdaq: DELL) or PepsiCo (NYSE: PEP), that’s not enough to base a comfortable retirement on. If they grow at a whopping 15% per year for the next 20 years, but you’ve just invested $10,000 in each, you’ll end up with $490,000 or so. Enough to retire on? Probably not. And it’s unlikely that they’ll grow at 15%, too. You should be conservative in your estimates. An annual growth of 8% will leave you with about $140,000.

Just 62% of workers and their spouses are currently saving.
What are the other 38% doing?

About 60% of workers cite significant debt as a problem, with half reporting credit card debt. These folks are among those most likely to be behind in their retirement saving.
This, sadly, does make some sense. If you’re drowning in credit card debt, perhaps paying 20% or more in interest on your obligations, it doesn’t make sense to be investing money that could pay off this debt in something like stocks, which might gain 10% per year. It’s smarter to pay off the high-interest debt first.

Among those who have estimated their retirement needs, 44% said they made changes to their retirement planning as a result.
This should be a wake-up call for all of us who have been putting off examining our retirement needs. A big chunk of people who do so make some changes. This means that there’s a good chance your financial life is in need of some critical changes — you just haven’t taken the time to realize it yet. It would serve you well to assess your situation and take action now.

Medical expenses are causing a lot of stress — 51% of workers said they are not confident of having enough money to pay for nursing home care or other home care. Some 41% had doubts about being able to pay for their medical expenses in retirement.
Living in retirement
Some retirees were also surveyed:

Among retirees, 47% said their income from all sources, including Social Security, employer-provided pensions, and savings, is lower than when they were working.

“Asked to describe their financial lifestyle in retirement, 71% said it is ‘adequate.’ 10% described themselves as well off, but nearly double that number (17%) said they were struggling.”
The solutions
So now you’ve seen the bad news. And it’s pretty bad indeed. Fortunately, there is good news. Financial literacy initiatives are in motion across the nation, targeting adults and young people alike. There’s much to be hopeful about.

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