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The Unrealistic Retirement Expectations Of The Middle Class

17 June 2015 in Investing Insights

When Jim was laid off from his supply chain management job at the age of 55, he only had about $15,000 in liquid savings to survive an extended period of unemployment. With a monthly expense bill of $2,500 to pay for a mortgage, food, transportation, and medicine for his arthritis, Jim has six months left before the lights go out.

After almost 30 years of work, why didn’t Jim save more? “Well, for one thing, I never expected to be unemployed at age 55. Globalization is making job security harder to come by. I was also a believer in Social Security, although now it seems like the government has no choice but to raise the collection age. 25 years ago, nobody ever thought we’d have such a huge budget deficit in America,” Jim responded.1

It turns out that Jim is not alone in his dire savings situation. A 50th percentile person between the ages of 45-54 has an average household net worth of only $84,542 according to the US Census Bureau.2 With a modest household annual expense rate of $30,000 a year, it’s no wonder why there’s so much retirement angst among the middle class.


Source: Fool.com, Census Bureau, data from 2011.


Having unrealistic expectations can lead to all sorts of financial challenges. Let’s take a look at four examples.

1) Social Security will take care of us in retirement. The government has openly admitted that Social Security in its present state is underfunded and will only pay out roughly 75% of its commitments if left unchanged.

“The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future. Finally, as Treasury debt securities (trust fund assets) are redeemed in the future, they will just be replaced with public debt. If trust fund assets are exhausted without reform, benefits will necessarily be lowered with no effect on budget deficits.” -Chief Actuary of the Social Security Administration.3

Depending on the government to fulfill its promises with Social Security is a risky proposition. As a result, it’s important to save and invest as much as possible on your own.

2) Hard work is all it takes to get rich. Unfortunately, hard work is standard amongst people who’ve successfully built a large enough nest egg for retirement. Not only does one have to work hard, one also has to persevere for as long as possible in order to save and invest. Jim was a hard worker, but he was unable to continue working hard for seven more years until his desired retirement age because of situations outside his control. His entire department shut down.

Besides hard work and perseverance, getting rich in America also depends on educational attainment, family background, health, and inheritance, according to a new report by researchers William Emmons and Bryan Noeth at the Federal Reserve Bank of St. Louis. There also needs to be a certain amount of risk-taking, good timing, and luck involved as well. If we look at the truly wealthy in society, many are entrepreneurs who decided to take a leap of faith to create something on their own.

Jeff Bezos, founder of Amazon decided to leave his multiple-six-figure a year investment-banking job to start Amazon. He came up with a “risk-minimization framework” that stated the risk of regret for not trying far outweighed the risk of failure. He didn’t want to end up a 75-year-old man filled with regret.

3) There will always be a job for someone who wants one. It’s easy to think we’ll always be able to find a job when we need one simply by using our good looks, charm, and skills. However, what if another financial crisis like 2008-2010 hits and millions of people can’t find work? One’s savings could easily be depleted in such a scenario.

In December 2007, the national unemployment rate was 5.0 percent, and it had been at or below that rate for the previous 30 months. However, at the end of the recession, in June 2009, it had risen to 9.5 percent. In the months following, the unemployment rate peaked at 10.0 percent in October 2009. Before that, the most recent months unemployment was over 10.0 percent were September 1982 through June 1983, during which time the unemployment rate peaked at 10.8 percent.


Source: BLS

Thanks to the sharing economy, thousands of people around the country are now part-time drivers for Uber and Lyft. Many more have signed on with companies like TaskRabbit to earn hourly wages cleaning houses or running errands. Technology has been able to unlock a tremendous amount of productivity in the workforce.


The above chart shows the hourly wages for Uber and taxi drivers in various cities in 2014. Although making $16.98 – $30.35 an hour is not bad, there’s also the cost of owning a car to consider that drastically reduces profits. Furthermore, hourly wages are declining due to increased competition. This doesn’t sound like the ideal retirement savings plan.

Although there might be plenty more small jobs to do, it’s unlikely any of these jobs will be able to replace a regular full-time job wage with benefits. Thus, it’s important to start managing your money early in case another period of high unemployment unexpectedly surfaces. Start saving for retirement as early as possible too and don’t be fooled by retirement myths.

4) A nice inheritance awaits. Baby boomers have saved and invested, helping push the stock markets to record highs. Surely, some of the $30 trillion dollars6 of wealth accumulated will pass on to the next generation. This may be so, but what if the timing for expecting an inheritance is miscalculated given people are living much longer nowadays? Even worse, what if there is no inheritance to speak of?

It may be more practical to work with the mindset that there is no impending inheritance that you can rely on, rather than the other way around.

The best way to ensure a healthy retirement is to start saving early and take responsibility for your financial future. Taking advantage of pre-tax retirement investment vehicles like the IRA, Roth IRA, and 401k can be a great move. Once you’ve maxed out your pre-tax retirement accounts, try and save additional after-tax money in order to continuously invest for yourself.

Consistent investment contributions, along with the power of compounding interest over time can help can get your portfolio ready for your retirement needs. Motif Investing offers no fee Traditional IRA, Roth IRA and Rollover IRA retirement accounts. Get started today.

Photo Credit: https://www.flickr.com/photos/jdhancock/8671399450/in/photostream/

1Anonymous prospective user

2Fool.com, http://www.fool.com/investing/general/2015/01/26/the-average-americans-net-worth-by-ageheres-where.aspx

3SSA, http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html

4Federal Reserve of St Louis, https://www.stlouisfed.org/household-financial-stability/the-demographics-of-wealth/essay-2-the-role-of-education

5BLS, http://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf

6Accenture, http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-CM-AWAMS-Wealth-Transfer-Final-June2012-Web-Version.pdf

  1. Patrick
    2 Sep at 8:09 am

    Check it out

  2. Richard McClure
    2 Sep at 8:22 am

    How many workers go through a 45year career without suffering through a layoff, career change, divorce or some other life event to take away from your retirement savings. Plus add the expense of owning a home and raising kids. Social Security should be there for everyone that pays into it. It is not an entitlement. Quit giving countries billions of dollars, they don’t like us any way.

  3. Pat Deeter
    2 Sep at 8:23 am

    What articles like this never mention is what you are suppose to use to live on while you are saving all this money for retirement. That is the problem. You make it sound like people just blow there money rather than save it, and some do, but the vast majority need every penny they make just to survive day to day.

  4. S T E E L W O L V E S
    3 Sep at 4:36 am

    Decrease in the value of money is a real problem usually not mentioned or recognized.

  5. tom tomko
    8 Sep at 4:51 pm

    How about eliminating that $3 billion given to Israel and Egypt every year to keep them from killing each other. And then there’s the military budget. How many $50,000 pensions would just those amounts equal? How about abolishing income taxes for everyone making less than 100,000 gross? How about abolishing a few aircraft carriers? How about abolishing the millions given to Planed Parenthood, just for starters?