Americans putting less money into retirement funds

A new study finds that Americans are putting less money into retirement funds, with over 90% of employees now contributing only a minimal amount, causing University of Missouri (MU) researchers to express concerns not only for the financial security of future retirees but also of the country.

As the baby boomers approach retirement age, an increasing number of Americans must be wondering how much money they should be setting aside to assure themselves of a comfortable retirement. Baby boomers are those born between 1945 and 1965.

However, against a backdrop of recent economic recession, and a trend where more and more employers are changing from defined-benefit plans that guarantee some level of retirement income, to defined-contribution plans, where employees have to invest on their own for retirement, future retirees face a difficult financial environment.

More should be invested into retirement funds during a recession

The researchers suggest the economically sensible thing to do in an economic downturn is to invest more, but this is not what is happening, as study leader Rui Yao, an associate professor of personal financial planning in the College of Human Environmental Sciences at MU explains:

“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.”

Prof. Yao says they should also be taking as much advantage of the maximum levels of contribution the tax system allows as possible.

Each year the Internal Revenue Service (IRS) sets the amount of income a person can set aside for retirement with tax benefits. These depend on whether the individual is under or over 50.

For their study, the researchers looked at how much income working Americans aged from 21 to 70 put into retirement funds in 2004, 2007, and 2010 compared to the IRS limits they were entitled to.

In 2004, they found 43% put 20% or less of their IRS maximum allowance, while in 2007 this figure rose to nearly 51%. And in 2010, they found that over 90% of working Americans were putting less than 20% of the IRS maximum into their retirement funds.

They note that in 2010, only 3% of Americans invested the IRS maximum in their retirement funds.

Prof. Yao describes their findings as “alarming”:

“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.”

“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,” she adds.

The IRS has recently announced a delay to the start of the 2014 Tax Season following the government closures, and heavy demand as operations resume.