A study by the Federal Reserve revealed that 46% of Americans would struggle to pay for a $400 emergency cost. The amount of savings and investment is frighteningly low in the United States.


According to the US Census Bureau, the average American over the age of 50 has a net worth of less than $200,000.

When you don’t include equity in one’s own home, this number falls drastically to less than $50,000.

There exist many possible explanations for the lack of savings amongst Americans. These explanations range from the lack of incentives caused by low interest rates to American cultural values encouraging consumption. Another large obstacle preventing people from saving, is a general lack of personal finance knowledge. In order to fully take advantage of compound interest, 20-year olds would have to start up retirement accounts. With record student loan debt, underemployment, and uncertainty about personal finance concepts, young adults face some serious impediments.

These are frightening statistics, especially when you consider that it is recommended for an average American to have at least $500,000 at retirement. The average American is saving no where near enough to support themselves when they retire. Fidelity recommends saving a minimum of 15% of your annual salary per year. For the average American salary of $46,000, this will accumulate into roughly $700,000 over a 30 year period; the issue is that Americans do not start saving nearly as early as they should for retirement.

Investing $6900/yr for 30 Years

*Assuming 7% interest rate

In fact, the National Institute on Retirement Security found that the average household had a mere $3,000 in their retirement accounts, increasing only to $12,000 for those close to retirement. This is a paltry sum considering that social security benefits average only $1,348/mo, and though it’s unlikely that social security benefits will disappear entirely, it is possible that these payments will get reduced.

One potential solution gaining momentum in recent years has been changing employee retirement plans from opt-in to opt-out. This means that companies automatically deduct a set percentage of an employee’s salary and deposit it into their retirement account. Employees can elect to opt-out, however this strategy capitalizes on human nature to maintain the status quo, thus it results in higher level of investment than opt-in plans. Under opt-in plans, employees are not automatically enrolled, but instead have to sign up to have contributions taken out. Unfortunately, this disproportionately advantages the wealthy who are more likely to have jobs with a 401k plan, thus it may exacerbate wealth inequality.

With the ubiquity of low-cost online brokers, robo-advisors, and index funds, it is easier than ever to open an IRA (Roth v. Traditional) and start reaping the benefits of compound interest, ensuring you and your dependents can retire free of stress.

 

Retiring Into Poverty