This past week, the Obama administration outlined new federal rules to stimulate savings for retirement, particularly among lower income workers. President Obama pointed to the fact that in the last year Americans have lost over $2 trillion from their retirement accounts and not enough of us are contributing to our retirement plans in the first place. After looking at the average U.S. savings rate and low percentage of Americans with retirement accounts, it is easy to see why action was needed. We’ll take a look at the numbers and discuss what the changes could mean for you.
The Average American’s Saving Rate
According to the Bureau of Economic Analysis, the average American was only saving 1% of their disposable personal income as recently as the first quarter of last year. That number has jumped to 5% in the 2nd quarter of 2009, the highest percentage in the last decade.
At the same time, according to the US Census Bureau, the average retirement age in America is 62 and average life expectancy is 77, meaning that 20% of the average American’s lifespan would need to be financially covered between personal savings and Social Security. Yikes!
Long-Term Sustainability for the Country
For long-term sustainable economic growth, that’s simply not good enough. The White House realizes that if Americans are saving only between 1 and 5% of their income per year for retirement, then just about everyone is going to need to live almost entirely off of social security. Not only is that unsustainable, it is downright frightening to think of what that might mean for the nation’s financial health.
In his weekly address, President Obama explains, “We cannot continue on this course. And we certainly cannot go back to an economy based on inflated profits and maxed-out credit cards; the cycles of speculative booms and painful busts; a system that put the interests of the short-term ahead of the needs of long-term. We have to revive this economy and rebuild it stronger than before. And making sure that folks have the opportunity and incentive to save – for a home or college, for retirement or a rainy day – is essential to that effort.”
Federal Changes to Retirement Plans
According to White House analysts, half of America’s workforce doesn’t have access to a retirement plan at work. Additionally, fewer than 10 percent of those without workplace retirement plans have one of their own. The federal changes will take effect to address these issues. Some of the biggest changes that could impact you are:
1. Auto enrollment in retirement plans: It will now be easier for smaller and medium-sized employers to automatically enroll workers into retirement plans due to an elimination of paper-work hurdles for employers to offer that option. Employees could still choose to opt out of the retirement plans if they choose to.
2. Saving tax refunds: To make it easier for those owed tax refunds to save, the IRS will allow tax filers in 2010 to recoup their refund by issuing US savings bonds. Last year, over 100 million US households received check refunds. And we all know what happens to most of those.
3. Sick and vacation days can become 401k contributions: It will now be easier for employers to convert (or allow workers to convert) unused vacation and sick leave pay into 401k contributions. Historically, this money is almost always converted into cash.
4. Automatic Percentage Increases: Many 401k administrators already have this, but now employers can boost contribution amounts automatically unless employees opt to have them not to.
Even if you’re not impacted by the government’s plan, there are still a lot of things you can do yourself to make sure you are in good shape for retirement. Start by asking yourself two questions:
What percent of your income are you presently savings towards retirement?
What percent do you need to save in order to retire when you want to?
Then follow this four step action plan to ensure you’re doing everything you can.
1. Boost your Savings. If you’re presently saving 10% of your income, boost it to 12%. If 20%, boost it to 25%.
2. Start a Roth or Traditional IRA. You can contribute up to $5,000 in 2009 ($6,000 if you’re 50 and above).
3. Take advantage of 100% of your company’s 401k match. You can’t beat free money.
4. Run the numbers. The Social Security Administration, Bloomberg, and AARP all have free retirement calculators to help you determine how much you need to be saving.
For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.