Financial behaviorists have said that getting people to spend less and save more is akin to getting people to stop smoking. Just telling people that smoking would kill them wasn’t even enough, they had to be banned from smoking in most public places and still people continue smoke in the privacy of their cars and homes.
So how to convince people they need to save more while they still can or face the horrible consequences of outliving their money in the final years of their lives?
There seems to be no answer to that question for despite constant warnings, one out of every two American continues to not save enough to feel financially secure about their future.
The latest data comes from a Bankrate.com poll that shows Americans are nearly evenly split when it comes to gauging their financial security.
Even with the gradual economic rebound, many Americans still feel less comfortable with their finances now than they did 12 months ago. The poll, conducted by Princeton Survey Research Associates International, also found that:
- Twice as many people feel less comfortable about their savings level than those who feel better: 38 percent versus 19 percent
- Only 10 percent of people between ages 50 and 64 feel more secure about their job while 29 percent feel less secure
- More than three quarters, or 78 percent, of Americans spent either less than or nearly equal to what they expected to spend during their holiday shopping
- 31 percent of workers with incomes less than $30,000 feel least comfortable with their debt loads but those who earn more than $75,000 are not far behind, with 17 percent feeling less comfortable with their debt
- Age significantly impacts overall financial security, with one of every three respondents over 50 believing they are worse off while only 15 percent of people younger than 30 feel that way.
The survey was based on telephone interviews with a nationally representative sample of 1,018 adults, ages 18 and older conducted from January 6 to January 9 by Princeton Survey Research Associates International. The margin of sampling error is plus or minus 3.6 percentage points.
As uncomfortable as this survey is, a report in The New York Times may make you wonder if there’s even a chance any of us could possibly save enough to have financial security because it found that even those who thought they were saving enough still came up short.
Financial meltdown
The Times article by Tara Siegel Bernard says that for the past 30 years financial planners have been urging us to save and invest diligently by putting your financial security in the hands of the stock market and pray that your investments double over the last decade before you retire. Look how well that turned out, especially if you planned to retire anytime soon. The financial meltdown basically wiped out any stock market earning of the past ten years.
So where does that leave us? The Times is saying that even if we do everything right and save at a respectable rate, we’re still relying on Wall Street’s big casino to carry us over the finish line through the miracle of compounding.
You know what? That is right. It’s that so-called snowball effect in which your money grows faster as more interest or investment growth builds on top of more interest. But in order to come up with the number you’re trying to reach, according to the Times, you’re actually counting on your savings, in real dollars and cents, to double during the last ten years.
But what if it doesn’t, or worse, does what it did in 2008, and set you back ten years? The only option then is to postpone retirement and keep on working if you can. This is exactly the situation millions of baby boomers are finding themselves in.
A more prudent course of action is a flexible one that acknowledges the many possibilities and accounts for ideal and less-than-ideal spending amounts.
Scott Hanson, a financial planner at Hanson McClain in Sacramento, told the Times that a better course of action is to be flexible and to use different assumptions for the years leading up to retirement. Hanson recommends that if you want to retire in 25 years, for instance, you might use a return assumption of 8 percent for the first 15 years of savings then reduce that rate to 6 percent or less in the final decade.
But even he admits there’s a catch. Hanson says most folks aren’t saving enough using standard growth assumptions and if they begin to use lower growth assumptions in order to ensure their retirement, they’ll fall further behind and become even more discouraged, which is exactly what the Bankrate.com survey showed.
