More than 90% of future retirees are not contributing enough to retirement funds, a study conducted at the University of Missouri found.
As baby boomers start reaching retirement age, a sizeable proportion of the American population is thinking more and more about how much they need to save for a comfortable retirement.
Employers are altering retirement benefits from defined-benefit plans which guarantee a certain level or income during retirement, to defined-contribution plans in which employees have to invest.
These recent changes, plus the Great Recession, have created an uncertain environment for people who are soon to retire.
Rui Yao and colleagues, at the University of Missouri, reported that over 90% of future retirees in the United States contribute only a minimal part of their salaries towards retirement funds.
Professor Yao said:
“With the future of social security benefits in America very much up in the air, it is crucial that people save and invest for their inevitable future retirement. We studied how Americans invested for retirement before and after the recent economic recession, and our findings were alarming.
Americans, especially those who are middle-aged, should be saving much more than they currently are for retirement, not only for their own financial security, but for the country’s sake as well.”
The IRS (Internal Revenue Service) each years sets how much of a person’s income they can set aside for retirement with tax benefits, depending on whether they are older or younger than 50.
Yao made a comparison between IRS limits and how much people were investing in retirement funds. She gathered and examined data from 2004, 2007 and 2010. She also wanted to see whether savings behaviors had changed after the Great Recession.
Yao found that:
- A maximum of 20% of the IRS maximum was being contributed to retirement funds among 43% of 21 to 70 year olds.
- By 2007, that number had grown to almost 51%.
- By 2010, it grew to over 90%. Only 3% of working adults reached the IRS maximum.
The trend was going in a counterproductive direction.
Yao said:
“Common sense economic theory tells us we should buy when the market is low and sell when the market is high. But Americans are doing the opposite of that and actually contributing less when the market is low, such as during the recent recession.
If Americans truly want to maximize their retirement funds, it is critical that they contribute more during a weak economy while they can ease up a little when the markets are higher. They should also take advantage of the IRS maximum levels of contribution as much as possible.”
During poor economic periods financial advisers and employers need to educate clients and workers on how important it is to contribute more towards retirement.
