Many Americans know that it is important to start saving early for retirement. But they may not appreciate how early it is.
Americans should start saving as early as age 25, saving $100 a week from then on to achieve more than $1.1 million in savings by age 65, according to the report from the Milken Institute.
While many challenges can prevent Americans from beginning to save for retirement at the optimal age, the Milken Institute offers several ways that individuals and society can help overcome such obstacles.
Cheryl Evans, director of the Milken Institute’s Center for Financial Markets, said of the study: “We decided to collect some of the best information that sheds light on the majority of factors affecting financial stability and financial security over time.” “Everyone wants to be financially secure. Everyone wants to live the life they want. So this is an issue that touches everyone on every level, and it cuts across demographics, and that’s why it’s so important.”
The study was based on meetings with financial and fintech experts including the Milken 2022 Global Conference. It found that about 25% of Americans lack retirement savings, and only 24% of workers feel “very confident that they will be able to retire comfortably”. Meanwhile, about half of Americans do not have access to an employer-sponsored retirement plan.
The study also highlights the many obstacles that stand between Americans and a solid retirement plan. They range from prohibitive healthcare costs and social inequality to exorbitant housing costs. But Evans said psychological biases and student debt in particular lead to some of the toughest challenges for young people looking to start saving for retirement.
For example, the study highlighted a “time bias” in which Americans struggle to identify themselves in the future and therefore fail to start saving for retirement when they should.
“Temporal Excluded People tend to view their future selves as different from their current selves, and cannot force themselves to take actions that might reduce present rewards in favor of benefiting those other selves in the future,” Milken’s study said.
Meanwhile, student debt places a huge financial burden on workers and delays them from starting a retirement plan. Tuition and college fees were nearly 1,500% higher in 2022 than they were in 1977, according to the report. Evans noted that student loan defaults show up in credit reports, which puts borrowers at risk of a lower rating, making it more expensive to borrow in the future.
Read more: Concerned about when to resume paying off your student loans? These programs can help
“That’s something people are well aware of, right? Like, you have to pay this no matter what. You have to pay this first,” Evans said. “So I think the idea is ingrained: I’ve got these loans, and I have to make these payments.”
The study offered other ways Americans can overcome barriers to retirement savings — both individually and systemically.
On an individual level, the report clearly focuses on combating “time bias” by communicating with their “future selves”. According to the newspaper, some experts suggest that Americans think of their current and future selves as two separate people who need help. That could mean sacrificing current needs for future needs, Evans said.
“There you are the young, and you are the old,” said Evans. “You want to take care of your old self, not yours now… Sometimes, thinking this way can be helpful.”
The paper also recommends that Americans practice visualization techniques to reach their financial and retirement goals. says James D. Loftin, CEO of Loftin Wealth Advisors LLC in Georgia, says he practices visualization himself and recommends young people do the same.
“You can turn your dreams into reality by visualizing and then executing as if it were art,” said Loftin, who was not involved in the study. “It’s like a skill set. And once you learn that, it unlocks the giant in you.”
The report also stresses the importance of financial education, and recommends that investors take advantage of the wide range of financial education resources available to them, such as those found in various banks and financial services companies. For example, Standard Bank’s “Financial Tips for Better Financial Education” covers saving and investment, according to the report.
Read more: Money Market Account vs. CD: What’s Best for Saving?
In particular, the Milken Institute also asserted that teaching Americans the power of compound interest could make them more likely to start saving at a younger age. As the study points out, compound interest refers to “when the interest earned on an investment is reinvested with an individual investment.” As funds are added, the account grows exponentially over time.
For example, according to Government compound interest calculatorWith an initial investment of $30 and a monthly contribution of $50, investors can make over $54,000 in 35 years, assuming an interest rate of 5% with a spread of 3%.
“We really want to highlight the power of composition,” Evans said. “So I think if people can really have this ability to multiply money and how small that amount can make a difference.”
matthew Benson, financial planner He added at Sonmore Financial that financial education can help Americans better handle their student loans.
“I think most people wouldn’t decide to take on $100,000 in student loan debt to earn $40,000 a year in a job if they had a mentor they could talk to about the issue,” he said. “I think the root of the solution really starts with financial literacy and training 18-19 year olds to be better financial decision makers.”
On a broader level, the study highlights ways in which financial technology products provide Americans with more opportunities to move forward in saving for retirement. For example, according to the report, they could use robo-advisors from companies like Vanguard and Betterment. Advisors provide real-time financial advice and process customer transactions.
The report also highlighted AI-assisted visualization. For example, T. Rowe Price’s “Visualize Retirement” product provides consumers with an online platform, program guides, and e-workbooks that allow them to map out their future. Evans said these visualization tools can help motivate Americans to prepare for retirement.
“What would I like my life to be like when I grow up? Do I travel? Right? This is kind of a visualization of those platforms that provide AI-assisted visualization that can help people overcome some of those biases.”
The Milken Institute report also expressed support for government-facilitated retirement plans. She highlighted Secure 2.0, which is signed into law in 2022 and could help millions of Americans save for retirement. As Milken’s report notes, the bill would require companies to automatically enroll employees in retirement plans unless they opt out. The report also adopted support for state-facilitated retirement plans. The majority of these plans, which have been adopted by 19 states, require automatic enrollment in Individual Retirement Arrangements, or IRAs.
“It really helps people who can’t get to a plan and who have a physically demanding job,” Evans said. “Suddenly, they can be younger at any age, and all of a sudden they can access the plan in those states. So, that’s really helpful.”
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