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How Much Do You Need to Save for Retirement?

Posted by Brandes Elitch | Mon, Apr 17, 2017 @ 09:13 AM

It seems like every time you pick up the business section of the paper you see an article in the personal finance column about the “impending retirement disaster” that is looming for Americans. These articles typically point out that most people are not saving anywhere near what they will need for retirement, and thus, will not have enough money to live on when they do. In this article, we will evaluate the statistics behind these observations; and then point out how CrossCheck can help your customers.

The median wage earner retiring at 67 years of age will typically get a social security monthly check for $1606, or $2409 if there is a spousal benefit. Compare this to someone who is working and making $54,000 a year, who would keep about $3500 a month after taxes and their contribution to their 401(k) plan.

save for retirement

This means that the retired person would have a savings gap of about $1100 a month! You could make up this difference by taking money out of your retirement savings. Most financial advisors recommend not taking more than about a 4% drawdown every year to conserve principal, which means that our average retiree would need to have about $330,000 in savings.

Do Americans Really Save for Retirement?

Now let’s get real. Most Americans do not have $330,000 in savings. The Federal Reserve estimates that the median account valuation for people in the age bracket 35-44 years is $42.7k, and for ages 55-64 is $103k. It is difficult to average this out, because most people haven’t bothered to save much at all, but of the people that have saved, the median amount is $172k.

save for retirementThe Employee Benefit Research Institute estimates that only 18% of Americans “feel very confident” that their retirement will be financially secure. When asked about their retirement plans, many people respond by saying that they plan to win the lottery (I am not making this up).

There is a lot of talk about the “one percent,” but it turns out that the relative leverage varies quite a bit by where one lives. It is a lot cheaper to live in Albuquerque, New Mexico than in Greenwich, Connecticut.

But let’s take New York City as an example, because that’s where a lot of the one percent are located. If they worked in New York City, their Federal tax rate would be 28% (with a marginal tax rate of about 40%), state income tax rate would be 6-8%, city tax would be 4%, social security would be 6.2% on the first $125k — you get the picture. The overall tax rate would approach 45% of your gross income, not counting sales tax and property tax. No wonder most people can’t save anything.

How Not to Save for Retirement

Let’s delve into this a little deeper. When all is said and done, the real answer is not about making or saving more money, but about spending less money.

This means living below our means, not relying on high-interest credit cards to make ends meet, and saving money where we can, both on what we buy and how we buy it. It means building an asset base and creating an income stream. It means “living small.”

It means not buying a fancy new car or a house that costs more than the median in your area. It means not taking exotic luxury vacations. It means sending your children to public school. It means, probably, not living in an expensive downtown location.

We Americans love to spend money. We even have a name for it: retail therapy. In fact, consumer purchases power two thirds of the GNP. What if we were just a little bit more careful about how we spend our money? Let’s look at an example.

How to Save for Retirement

If one has $12k in retirement savings and contributes $100 a month with an annual growth of 6.5%, in 20 years this will amount to $88k. But, if they contribute $200 a month, in 20 years this will amount to $135k. So the question becomes, “how do they save an extra $100 a month?” Here is where CrossCheck can help consumers save for retirement. Let’s look at an example.

Let’s say a consumer is in the market for a car. They could buy a new car (on average about $34k), lease a new car (which is more expensive than owning a car), or buy a used car (on average $18k or about half as much as a new car).

Let’s say they are sensible and find a nice used car for $20k. In most cases, they will have to make a down payment on a used car, and it is typically about 10% or more to garner a lower rate. Now let’s say that, like most save for retirementAmericans, they just don’t have $2000 just lying around in their checking account. With decent credit, they get a few unsolicited credit card offers in the mail every month, so they decide to just take advantage of one of them.

The initial “teaser” rate on revolving balances is 14.9%, but rises to 18.9% in six months. There are merchant programs out there that are offered at the point of sale, such as CareCredit and BillMeLater, that make it easy to do this. This means that if they keep revolving this balance, which is what about half of the people do, they will be paying $378 a year in interest charges … forever! That’s almost one third of the goal of saving an extra $100 per month for the year.

The New York branch of the Federal Reserve publishes a study called the “Consumer Credit Access Survey.” The February 2017 publication showed that while a third of those surveyed could not come up with $2000 over the next 30 days if the need arose, 65.9% said that they could get the cash. The survey showed that about 75% of those surveyed said that they do not want to apply for credit. These two metrics work perfectly into the solution offered by CrossCheck. Here’s why.

If, for example, the auto dealership offers our Multiple Check service, then the buyer doesn’t have to apply for credit or pay interest. They just writes up to four checks and tells the dealer when to deposit them over the next 30 days. It’s that simple! We have found that if we give consumers some more time to come up with the money, they can do that about 95% of the time, just not on the day when they are standing in the showroom and buying the car.

So now consumers are well on their way to putting away an extra $100 a month into a retirement account. And if they are “living small,” they will be well on their way to being adequately funded for a long and happy retirement. Download our free guide to learn more about Multiple Check and how it can help your customers save for retirement.

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Topics: Brandes Elitch

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.