Recently I’ve seen a number of financial articles around Millennials lack of retirement savings as well as Seniors working longer because both groups expressed feelings that they can’t afford to save for retirement (see linked articles from Business Insider as well as CNBC). As we previously covered the topic in our 5 Simple Things You Can Do To Save More even the smallest of events can lead to serious savings.
What is the “Middle Class” these days anyway?
Not Long Ago CNBC posted an article 52%of Americans are considered ‘middle class’-here’s how much money they earn that outlined a 2018 Pew Research Center report on the current statistics. As you could see from the article the Median income for middle class households is defined as $78,442 however geographical considerations as well as household size can ultimately determine what the middle class would be defined as in different areas of the country. There are even calculators that are available to see what group someone would fall into compared to others in your geographic location as well as those across American Adults overall. The ranges of income for middle class by household size is as follows:
|Single Household:||$26,093 to $78,281|
|Household of two:||$36,902 to $110,706|
|Household of three:||$45,195 to $135,586|
|Household of four:||$52,187 to $156,561|
|Household of five:||$58,347 to $175,041|
Saving can create wealth even in small increments
One of the biggest obstacles to the workforce both old and young is the feeling that “I don’t make enough to save”. Most shockingly, this leads to not only a low average savings rate in 401k plans (national averages are approximately 4% contribution rates into company retirement plans) but in surprising numbers it is beginning to show that some aren’t saving at all.Let’s take a look at some numbers around the previous data we collected and where they could lead to if an automatic savings was started in a company 401(k) plan: if we use the average in the range of Middle Class single households($52,187) for all illustrations and the average company contribution as a percentage of salary of 4.7% as determined by a May 2019 Fidelity Investments study. First, we will start with the national average of 4% from the $52,187 salary for an annual total of $2,087.48 of salary deferrals with a match of 100%(per the 4.7 national previously mentioned) meaning that in total your 401k has deposits of $4,174.96 in combined deposits. Now, 401k deferrals are made pre-tax, meaning that the money is deposited into your retirement account before ever having any deductions taken from it. So assuming that about 30% can go to tax, healthcare and other deductions we have to realize that our annual contribution is not $2,087.48 out of our take-home pay – in fact it is only an impact of $1,461.24 for the whole year or approximately $28 a week that would be assumed out of one’s payroll check.
I can spare the $28 per week but what will it really do for me?
Ok, so now we have looked at what the income impact could be to take on this venture and possibly you’ve even had the thought that there’s a few things you could trim back to find the $28 a week but immediately the thought comes in: “what is $28 per week really going to do for me in retirement?”. First, lets take a step back and remember that the $28/week is your after-tax impact not including any employer match, and that’s part of where the magic of automated savings, employer matching as well as compounding growth comes in. Especially in the case of someone who has a long time ahead of them (lets look at a 40-year time horizon) this can almost seem like magic.Assuming nothing changes in contributions or matches (meaning that there is now age growth from the individual that would gradually increase the savings) an investor with a return of 10% on average could have $2,032,586.84 at the time of their retirement. Not bad for skipping a few cups of coffee or dinners out huh?!? Its also important to note that the median return for the S&P 500 over the last 40 years is 9.958% so the natural question of if 10% is a realistic return can be resolved with that data as well.
Why these things are important to you
First, the concept of starting early and automating your savings is a common theme that we’ve discussed and will cover time and again due to the impact that it creates over time. So, if nothing else is taken away from this start saving as early as you can, make it automatic and review your progress along the way. Its also important to discuss these things because its human nature to feel “average” or even perhaps below average (i.e. the feeling of that’s not me, I can’t obtain that wealth). Also, the process of generating wealth is one that is formed in good habits such as the disciplined savings we outlined before. Often times it can be the obstacles we create for ourselves such as dismissing smaller contributions and waiting to start saving later that can play the biggest impact to where we end up, its common to fear market swings but until someone has planned they may not realize what their approach may be taking away from the nest egg.
Interested in learning more?
It never too early or too late to get started! If you are interested in speaking with a Financial Planner here at Coastal Wealth Planners you may choose from the following:
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