Covid-19 has many things to answer for and here’s another: the stress it is causing with regard to retirement savings. Saving enough money for a comfortable retirement is always a major source of financial stress but the percentage of those worrying about an inadequate pension fund has risen due to the pandemic.
In May and June 2020, Charles Schwab conducted a survey in the US asking 1,000 employed Americans who are already saving into company-sponsored retirement plans how much they thought they would need to save to retire comfortably. The answer was $1.9million, compared to $1.7million in 2019, a rise of 12%. For millennials the figure is $2million.
With an objective of $2million to save and a pandemic throwing a spanner in the works, it is perhaps not surprising that 14% of those interviewed feel that this figure is unattainable while 21% expect to retire later than they originally planned and 12% have increased their contribution rate.
Maybe you think that $2million sounds excessive, but I’d argue it really isn’t as much as you think. Why?
One reason is that people make so many assumptions about retirement which are false.
The reasons why so many people underestimate how much they need in their retirement fund
- They assume their expenses will fall in retirement – they often don’t.
- They work on a particular rate of return which turns out to be false – nothing is guaranteed.
- They think social security will fill the gap – it won’t.
- They underestimate how long they will need their pension fund to last – life expectancy has been rising steadily for a while. The number of centenarians in the US rose by 44% between 2000 and 2014.
- They fail to take inflation, taxes and investment risk into their retirement planning
Let’s talk about inflation because it is so often neglected in retirement planning in spite of the massive influence it can have on the value of our savings.
Why it’s important to factor inflation into your retirement plans
Inflation causes the value of money to fall as prices increase and therefore reduces buying power. It’s most easily explained by using an example.
If a loaf of bread costs $1 at the beginning of the year and the inflation rate is 5%, the loaf of bread will cost $1.05 at the end of the year.
While 5 cents sounds like nothing, if you scale that up over lots of different items and over many years, the effect on your spending power can be devastating.
So let’s say you think $2million is excessive and you believe you could happily retire on a more modest sum of $750,000. You need to consider the effect of inflation on $750,000 in today’s money and what it will be worth when you retire. Of course, that depends how far from retirement you are.
If you are nearing retirement, $750,000 could be enough for you, depending on the kind of lifestyle you are expecting. However, bear in mind that when you started saving forty or so years ago $750,000 would have had much greater purchasing power. To give an example, if we take 1980 as a base, $750,000 would have been worth around $2.5million in today’s money according to this nifty calculator from the US Bureau of Labor Statistics.
And that’s what those who still have a long way to go until retirement need to bear in mind. Someone in their mid to late 20s will most likely have 40 or so years left until retirement. By 2060, if we take an average annual inflation rate of 3%, $750,000 in today’s money will be nearly $2.5million.
You can play around with different figures using an inflation calculator but the overall takeaway will be the same – inflation is going to diminish your future buying power and you will need a bigger pension pot than you think.
Ensuring your savings are growing faster than inflation
This is one reason why it is so important to invest your savings carefully. You need to ensure that your retirement fund is outpacing inflation to avoid its value from falling in real terms.
The stock market is feared by many but it remains one of the most effective tools out there to build wealth. It certainly isn’t risk free but what is? And if you look back over history, holding stocks over the long haul (decades rather than years) has always delivered capital growth. Here’s a graph breaking down stock market returns into 40-year time frames – all of them demonstrating exponential growth.
If you are worried that you are not on track for a comfortable retirement, now is the time to act. Why not make an appointment with me to look at your situation and work out a strategy to get you where you want to be? I can help you work out realistic savings goals and recommend investment products which can maximise your capital growth, however long you have left until retirement.
Contact me today at email@example.com for a review.
Senior Financial Consultant- Highly Commended Emerging Talent of The Year (International Investment Awards 2019)
I aim to maintain and grow an excellent relationship with each client which lasts throughout their working lives and beyond. I strongly believe that a good financial adviser can make a significant difference to an individual’s financial success and positively impact their lives, which is why I love doing what I do.