Why Some Americans Are Under-Prepared for Retirement

A pre-pandemic report from the U.S. Federal Reserve found that one-quarter of American adults haven't saved anything for retirement at all. Adding to that, a 2018 Wall Street Journal analysis shows that those aged between 55-70 don't have enough savings to keep up with their current lifestyle in retirement. Here, we list several reasons why Americans could fall short in retirement savings unless some changes are made.

Average 401(k) Balance Is Less Than Projected Healthcare Costs in Retirement

Investopedia points to a recently updated Fidelity Investment report, which states that an average couple retiring at age 65 in 2021 might require an estimated $300,000 post-tax to cover health-related expenses in retirement. Fidelity also revealed that the average 401(k) balance of U.S. workers stood at $121,500 in Q4 2020, as reported by TheBalance.

According to the Administration of Community Living, managed by the U.S. Department of Health and Services, 70 percent of those turning 65 this year might require some form of long-term care, and 20 percent might need it for more than five years.

Even though Medicare will pay for your medical supplies, doctor visits, physical therapy, or medical social services when you turn 65, keep in mind that the scheme will only cover a portion of your stay in nursing facilities for up to 100 days.

Only 29 Percent of Americans Worked With a Financial Advisor in 2020

Even though robo-advisors are gaining popularity, the intuition and experience of in-house financial advisors remain unmatched. Certified Financial Planners (CFPs), for instance, usually put in 1,000 hours to complete coursework and the CFP exam before they can offer financial advice.

A financial advisor would attempt to establish a safe space for you to open up about your finances, which many Americans aren't comfortable with. They want to understand your spending habits, cash flow, eligibility for government benefits, insurance, and tax situation, your sensitivity to market movements, and your risk appetite to create a roadmap to wealth.

However, according to Statista, there could be multiple reasons why many Americans refrain from teaming up with financial advisors. Some cite high fees, whereas many simply don't believe financial advisors would work in their best interests. While these notions may be true in some cases, they do not reveal the complete picture.

Financial advisor fees could range from $1,000 to $3,000 for a financial plan or one to two percent of Assets Under Management (AUM) annually. In a way, teaming up with a financial advisor could be a small-scale investment in itself. However, if you team up with the right one, fees shouldn't matter in the long run.

Advisors usually follow either suitability or fiduciary standards. Those who follow the suitability standards are required to find suitable opportunities for your investment goals, and not necessarily the best ones. Fiduciary advisors, on the other hand, are bound by law to work in your best interests. Narrowing down your search to vetted fiduciary advisors could help you find an advisor who will look after your interests.

An in-house fiduciary advisor could therefore help you draw a retirement plan that suits your financial aspirations while protecting you from making emotionally charged financial decisions during market upheavals. According to a TransAmerican Center for Retirement Study, 22 percent of U.S. workers plan to or have already withdrawn from their retirement funds like 401(k) or 403(b).

While a fiduciary advisor will try to find the best investments for you, make sure that the advisor's expertise is aligned with your preferences. Let's say you want to invest in long-term stocks and mutual funds as well as need help with taxes. Then it helps if your advisor has a sound understanding of them all. A survey conducted by a financial services provider called Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF) found that 48 percent of Americans struggle to find trusted sources for financial advice.

While this may indicate confusion and a lack of trust, it could help to begin your search for financial advisors on the financial website SmartAsset. This fintech company is a renowned recipient of multiple awards and accolades for its proprietary financial tools and services that cover the entire spectrum of personal finance. In fact, over 65 million people use SmartAsset's tools and services every month for making educated financial decisions.

SmartAsset's strong suit lies in its financial advisory services managed by a dedicated concierge team. Simply take a brief online quiz and their concierge team will connect you with up to three vetted fiduciary advisors near you. You can then interview all of them and conduct a background check using the Securities and Exchange Commission's website before making any decision.

Americans Are Getting a Late Start at Retirement

Forbes points to a study that says one in six American households with breadwinners below 55 'aspire' to retire by 55. In contrast, a Center for Retirement Research at Boston College study finds that the average age of retirement in the United States is 65 for men and 63 for women. These studies could indicate that there's a clear gap between retirement expectations and reality.

Time could be your biggest ally or worst enemy, depending on how wisely you spend it. Let's take an example where John contributed $300 every month to his tax-deferred 401(k) retirement fund since he was 25, and Gary started with the same amount at 30. Considering the average S&P 500 stock returns at 10 percent compounded annually, John would have accumulated $592,178 by 55, whereas Gary would fall behind by $238,129 with savings of $354,049.

Though it might not sound impossible to save $300 a month early in life, the struggle extends to a lot of millennials. According to CNBC, 68 percent of millennials - born between 1981 and 1988 - are still clearing their student loans. High credit card debt and the fact that fewer than four in 10 Americans can pay a surprise emergency expense of $1,000 could make it tougher to save money. These circumstances could cumulatively deter their plans to save for retirement in their early years.

Social Security Benefits Could be Significantly Reduced by 2030

A report released by the Congressional Budget Office in September 2020 indicates that the Social Security Trust Fund balance, mainly financed through taxpayer money, could drop from an estimated $2,787 billion in 2021 to $533 billion in 2030.

The primary reason for this could be that the American population aged 65 and above is projected to increase over time—from56.1 million in 2020 to 73.1 million by 2030, according to Statista. A possible consequence would be that the Social Security benefits paid out would exceed the revenue collected from payroll taxes. A report from Congressional Research Service estimates that if Social Security funds were to run out by 2035, benefits could be reduced by a significant 21 percent to achieve a balance that would stop the Social Security fund balance from running dry.

Why is this a big deal? According to the Social Security Administration (SSA), 65 million Americans will receive SSA benefits in 2021, which will amount to a staggering amount of $1 trillion paid in benefits through the year. More importantly, the fact sheet states that SSA benefits comprise "33 percent of the income of the elderly," with an average income of $1,544 every month for retired workers. A drop in benefits offered through SSA due to low trust fund balance could therefore significantly affect their monthly budget for necessary expenses.

The problem doesn't end here since the Social Security income also depends on when you claim them. Forbes states that someone who claims SSA benefits at the age of 70 will get $3,790 per month as of 2020, whereas the income dips to $2,265 if you claim at 62 years of age, which is the earliest age you can file for Social Security benefits. Those claiming at the age of 67 would be entitled to a monthly income of $3,011. Although Social Security benefits may offer a stable source of income in retirement, you shouldn't entirely rely on them.

The retirement crisis appears to be a combination of financial illiteracy, high debts, and poor planning. A financial advisor following fiduciary standards might be able to align your assets with your goals and timelines while educating you of the intricate details every step of the way.

Match with a fiduciary advisor here.

The content of this article is for informational purposes only and does not constitute any financial or investment advice. It's important to perform your own research and consider seeking advice from an independent financial professional before making any banking or investment decisions.