Podcast Episode 173: New Stats on How Americans Save for Retirement

Today’s Wisdom:

Vanguard recently released its latest report on how Americans are saving and there are some eye-opening statistics about retirement accounts. Let’s look through some of the data that stood out to us and determine what it tells us about how well we’re utilizing the defined contribution plans.

Want to save time? Click the timestamps below to jump ahead to specific spots in the episode.

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What You’ll Learn:

Comparing yourself to other people will never provide you the context you need to know how well you’re planning for retirement, but it’s interesting to look through the stats to see what other Americans are doing with their savings.

Every year, Vanguard releases a report based on the data they have and share the findings to give us a look at how the saving habits are changing. For example, this report that tracks 2019 and into early 2020 shows that automatic enrollment has tripled over the past 12 years, which makes it easier for people to set up a plan and stick to it.

In this episode of the Money Wisdom podcast, we’ll dive into this report and pull out a few of the statistics that caught our attention. We’ll tell you why they are important and what it tells us about the way Americans are saving for retirement.

Let’s start with target-date funds, which invest more conservatively as you near retirement. This report shows that more than half of Americans have some amount of investment in target-date funds within their retirement accounts. While these might not always be the best investment, they do a good job for people that don’t work with an advisor because it keeps you from moving money around between investment options.

The target-date funds are a good way to start an automatic savings plan through your employer. If you are young and just starting your career, using target funds to begin building up their savings is a great way to approach it. Later in life, you can re-allocate into different investments once you’re more comfortable with your finances.

Another interesting stat tells us that 74% of all plans offered a Roth 401k option but only 12% of participants elected to use that option. Joel feels this number should be higher because taxes are likely to go up and it’s a good idea to take advantage of the current rates by using the Roth. Right now, the chances of your taxes being higher in retirement are pretty strong, especially if you are younger.

But even if you are close to retirement, there’s nothing wrong with having the option to pull money out of two different tax buckets. That’s the approach Joel is taking with his investments as he explains on the show. If you aren’t sure whether your company offers a Roth, ask someone in HR because they don’t always publicize the option.

The next stat we highlight is company stock holdings have dropped about 16% from 2010 to 2020. This might be due to the huge losses that major companies like Enron and GE have taken in the past. Overall, this is a positive because too many people have over-invested in company stock for a long time. Sure, massive wealth is built through high concentration but there’s a huge risk associated with that strategy. Hitting singles and doubles is a much more successful strategy than trying to hit home runs for most people.

Another thing the report showed is that men were more likely to contribute to their retirement account than women, which was surprising. From what we’ve seen, women typically make better decisions with their money and are more conservative with their long-term approach.  

We’ll go through additional stats and go into even more detail on the podcast so give it a listen.

Mailbag Questions

The first question today asks whether it’s a good idea to take Social Security at 62 and use that extra income to pay off the mortgage before retirement. This is an answer that requires a lot more information about your finances, but we have a program that allows you to plug in different pieces of info to help you maximize your benefit. For this specific scenario, it’s important to remember that you don’t have to be mortgage-free in retirement. There are ways to build a plan for this monthly payment.

Our next question comes in about life insurance. Is this a good way to create retirement income? The answer could be yes, but you need time on your side. We’ve worked with clients who have benefited from a life insurance policy so it can be a good investment. But you need to plan for how this fits into your entire retirement portfolio. And make sure it’s designed with you in mind, not the person selling the policy.

The final question is about leaving a legacy. Should you continue to save and pass as much along as you can or enjoy your retirement and give your children what’s left? This is a perfect example of how we act as financial mediators at Johnson Brunetti. We work with couples to find out if we can reach a happy medium, but it depends on how each person was raised with money. Generally speaking, we suggest that your retirement is the priority and the children are secondary but that doesn’t work for everybody.  

[0:40] – Target seasonal hires have a different focus this year.   

[2:10] – Vanguard stats on target-date funds. 

[6:17] – Stats on Roth 401(k) option

[8:51] – Over the past 10 years, company stock holdings dropped 16%.

[11:19] – Hardship withdrawals from 401(k) accounts have increased.

[13:06] – Men more likely to contribute than women.

[17:41] – Mailbag Question: Should I start my Social Security at 62 to help me pay off my mortgage before I retire? 

[18:47] – Mailbag Question: I’ve heard about a strategy using life insurance to create income in retirement? Is this a good idea? 

[20:22] – Mailbag Question: My husband wants to leave a lot of money to the kids but I’ve worked hard to save for retirement and don’t want to have to watch my money. What’s a reasonable amount to leave as a legacy?

Thanks for listening to this episode. We’ll be back again next week for another show.

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Final Thoughts:

“Wealth is created by concentration and preserved by diversification.”

– Joel Johnson, Money Wisdom Podcast

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