The Retirement Savings Crisis: Why Younger Generations are Falling Behind

Why did the piggy bank go to the psychiatrist? It was feeling a little empty inside.

⚠️NOTE⚠️ This blog post is for informational purposes only and should not be considered as financial advice. Before making any financial decisions, readers should consult with a regulated finance professional and do your own research (DYOR).

The issue of retirement savings has become increasingly prevalent in recent years, particularly amongst the younger generation. Despite being faced with the prospect of longer life expectancies and a changing job market, many young people are not saving enough for their retirement. This is a cause for concern, as it will likely result in financial instability for many individuals in their retirement period.

Problem: The average working household has virtually no retirement savings.

Research has consistently shown that younger generations are falling behind when it comes to retirement savings. According to a recent survey conducted by the National Institute on Retirement Security, nearly 40 million working-age households in the United States have no retirement savings at all - whether in an employer-sponsored 401(k) type plan or an IRA. 62% of working households with age range of 55-64 have retirement savings less than one times their annual income.

It’s a global problem - According to a report by the World Economic Forum, the global retirement savings gap is projected to reach $400 trillion by 2050, with the largest gaps seen in Asia and North America.

Why is this happening now?

One of the main reasons for this is the lack of access to traditional pension plans. For example in the UK, a fair number of people working in public sector had a defined pension which is based on the years you have been an employee and the final salary at the time you retire. These types of pension plans were once the main source of retirement income for many people, but they have become increasingly rare in recent years.

Many younger workers are now relying on individual retirement accounts (IRAs or SIPPs) and other types of savings plans, which can be harder to manage.

Additionally, the changing job market has made it less likely for people to stay with one employer for a long period of time. This has reduced the number of people who are eligible for pension plans.

Solution: Change our approach to saving for retirement

It is important for policymakers, employers, and individuals to take action to address this issue and ensure that younger generations are able to secure their financial futures. This could include increasing access to a wide range of retirement plans, improving financial education, and encouraging young people to start saving for retirement as early as possible.

Many employers are now offering automatic enrollment in their retirement plans, which means that employees are automatically enrolled in the plan unless they opt out. This can increase participation rates and make it easier for employees to start saving for retirement.

Retirement plans can be overwhelming with too many investment options, making it difficult for individuals to make informed decisions. Using tools that would simplify this for people should translate into a higher amount of saving.

More importantly, as a society we need to have better relationship with money. It involves being mindful of one’s financial goals and taking steps to achieve them while also maintaining a healthy balance between spending and saving. It also involves being mindful of one’s financial situation and taking proactive steps to achieve financial security and stability. By doing so, individuals can reduce financial stress and anxiety and make informed decisions that support their long-term financial well-being.

Ways to optimise

Start Early: The earlier you start saving for retirement, the more time your investments have to grow. By starting early, you can take advantage of the power of compounding, which can significantly increase your retirement savings over time.

Automated saving: Ensure that your savings go out of your bank account within a day of you receiving your salary. Humans are bad at these tasks. You want to have minimal friction to increase regular savings.

Reduce debt: Paying off debt can help you save money in interest charges and free up money each month to put towards savings.

Use tax wrappers to save: In the US and the UK Individual Retirement Accounts (IRAs) and Self-Invested Personal Pensions (SIPPs) are two popular savings schemes that can be used effectively to achieve the goal of a secure retirement. There are similar account available in most western countries.

Maximize Contributions: Accounts such as IRAs and SIPPs have contribution limits, and maximizing these limits can help you reach your retirement savings goals more quickly. Consider increasing your contributions each year, or taking advantage of catch-up contributions. IRAs and SIPPs offer tax benefits, which can help you save more for retirement. For example, contributions to a traditional IRA may be tax-deductible, and the investment earnings grow tax-deferred. SIPPs also offer tax benefits, including the ability to claim tax relief on contributions.

Diversify Investments: Diversifying your investments is key to reducing risk and maximizing returns. Both IRAs and SIPPs offer a wide range of investment options, including stocks, bonds, and mutual funds. Consider creating a well-diversified portfolio that includes a mix of low-risk and high-risk investments. You may want to explore how index investing can help you save on fees.

Remember, small changes can add up over time, so be patient and stay focused on your goals.