Not so very long ago, people could look forward to retiring at age 65. Many set their sights on retiring by age 55. They could look forward to many rounds of golf and lots of time with their grand kids. This was fueled by monthly income they could rely on from corporate pensions and healthcare benefits supplemented by Social Security and government health care.
Unfortunately, this dream has become a joke and they sad fact is that you may never be able to retire. Why is this? There are six principal reasons.
1. Corporate pensions gutted
Until a few years ago, most pension plans were called “defined benefit” plans. This is where the corporation paid you a fixed amount of money every month after you retired. However, these have gone the way of the dodo bird and have been replaced with what are called “defined contribution” plans such as 401(k)s. One survey revealed that between the years 1998 and 2010, the number of Fortune 500 companies that offered defined-benefit plans dropped from 67% to 17%. And defined contribution plans rose from 10% to 58%. What this essentially means is that if you work for a company that has a defined contribution plan, you’re pretty much on your own. The only way you will be able to retire is if you are able to sock away a lot of money in a 401(k), an IRA or in investments.
2. Declining income
A second blow is that the money that could go into savings to make up for that change in pensions is falling on an inflation-adjusted basis. Another recent report revealed that most of us got poorer during the years between 2000 and 2010. To be specific, the median household income for Americans fell 2.3% to $49,445 in 2010 and if you adjust for inflation it’s dropped 7% since 2000.
3. Increased childcare expenses
There has been a dramatic rise in dual-working couples. The Census Bureau has said that between 1950 and 2008, families where the man was the sole breadwinner dropped from 63.4% to 16.9%. In comparison, families with dual-earning couples rose from 20.4% to 42.4%. The net result of this is that even though many families have increased their incomes a lot of the money has gone to childcare and not into savings.
4. The collapse of return on investments
Another significant negative is that people with defined contribution plans can no longer expect a significant rate of return on their investments. It used to be that you could count on about an 8% rate of return a year but this has disappeared. Stocks have earned just a bit more than 2% a year in the past 10 years and the S&P 500 has shown an average annual return of just 1.8% between the years 2002 and 2012. To make matters even worse, fixed income investments are doing no better. For example, the 10-year Treasury note is now paying just 1.72%. If you wanted to earn a mere 2.8% on your investment, you would have to park your money in a U.S. Treasury bond for 30 years. In short, the best annual returns you can expect to get are about 6% a year too low. If you’re a public employee, you may also be the victim of this paltry rate of return.
If you’d like to calculate the rate of return on your investments, watch this video to learn how to do this.
Not enough savings
There is a rule of thumb that you should have 60% of your pre-retirement income a year for a comfortable retirement. This means that if you earn $100,000 a year before you retire, you would need at least $60,000 a year. But here’s the big catch. Let’s suppose you have saved $10 million and it yields the typical 0.5% money market rate, providing $50,000 a year in income. Assuming you supplement that with social security – where the average monthly benefit in 2012 was $1200.00 – you could be okay. But do you realistically expect to have $10 million saved up? Very few people will. The Employee Benefits Research Institute reported that only 17% of us had more than $250,000 saved up in 2011. And of those surveyed, 16% had saved up less than $50,000. This may sound harsh but what it means is that most of us will not have enough money for retirement.
5. Too small an inheritance
What can you do if you haven’t saved up enough money on which to retire? You basically have three options. You can keep on working until you die, you could inherit enough money to retire on or you could retire without enough money to pay your bills. The baby boomers that were born between 1945 in 1965 are expected to inherit a total of $8.4 trillion. This means the average boomer household will inherit $300,000 with the wealthiest ones receiving an average of $1.5 million. But as you can see from the example given above, $300,000 is not enough to guarantee retirement.
Even if you saved enough
Sure, there’s a chance that you will be able to save up enough money to retire but what happens if you get hit with unexpected expenses? If you got sick and needed an expensive medical treatment not covered by your insurance this could totally ruin your plans. The same would be true if you have a large amount of unpaid debts or if there is a financial calamity that slashes the value of your retirement savings. Of course, if everything breaks right you might be able enjoy that idyllic retirement. But for most of us, the concept of retirement is dead.