Retirement Crisis Brewing for Half of America

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By Lou Carlozo

Financial advisers and planners know the issue all too well, as do retirement experts: There is a pressing need for Americans to contribute to a 401(k), individual retirement account or some sort of structured, tax-deferred account to take them through their post-employment years.

Yet recent government statistics reveal quite the shocker: Just 53 percent of the civilian workforce participates in or contributes to a retirement plan, according to the U.S. Bureau of Labor Statistics. In the private industry subset, it's even lower: 48 percent. Among the two major civilian categories surveyed by the bureau, only one -- state and local government workers -- shows healthy participation rates at 81 percent.

Low-income and part-time workers are at particular risk, because in many cases, they don't have access to a retirement plan through their employer, says David Stone, CEO of Aria Retirement Solutions in San Francisco.

Nonessentials Apparently Come First

"Many Americans have moved out of the traditional corporate employment world and work for small businesses," Stone says. "They may juggle more than one job, and it can be quite a struggle to make ends meet, let alone set aside money every month to put into a retirement plan. Also, many younger Americans are working in more entrepreneurial positions, with reduced or no benefits."

While roughly half of the workforce sits on the sidelines when it comes to funding accounts, some experts say the statistics reflect a portion of the population that squanders potential savings on nonessentials.

"Ironically, poorer Americans are the greatest purchasers of lottery tickets," says Ric Edelman, founder and CEO of Edelman Financial Services. Citing figures from the Institute for American Values, a nonprofit that calls itself a nonpartisan think tank, he points out that households earning less than $13,000 per year spend 3 percent of their income on lottery tickets.

"That's $100 per month thrown away," Edelman says. "If they invested that money at 7.2 percent per year for 40 years, they'd amass more than $277,000."

New Value System

"Sadly, I'm not surprised at all by the findings," says Chris Alberta, founder and president of Alberta Enterprises, a wealth management firm in Brighton, Michigan. "The value system has changed so dramatically over the past few decades that most Americans who could systematically invest in retirement are now faced with a binary decision: Do I spend every dime living the American dream now? Or do I live more modestly to spend my golden years comfortably?"

Depending on a worker's status, retirement plan participation varies sharply. The BLS figures, part of its National Compensation Survey for the first quarter of 2014, show that union employees across the board have between 83 and 89 percent participation. Nonunion employee participation dips to between 48 and 74 percent. For full-time employees, it's up to three times greater than those in part-time posts.

But the ultimate sacrifices for those who don't contribute can be huge, although most workers remain unaware of this, says Ben Pahl, a financial advisor with the Tranel Financial Group in Libertyville, Illinois.

Financial Literacy Needed, Too

"Financial literacy in our society is very low," Pahl notes. "There's very little effort made to educate our society, especially our young people, on how to manage money. Even a typical 30-year-old can't explain the difference between a Roth IRA and a traditional IRA." For those who don't know, with a Roth IRA, you pay taxes as money goes in. A traditional IRA account defers taxes until money comes out.

To illustrate how much money people stand to lose by starting an IRA late in life, Pahl cites the example of a 25-year-old who socks away $4,000 a year for 10 years versus a 35-year-old who contributes $4,000 annually through age 60. Both get a 10 percent annual return rate, but thanks to compound interest, the former will accrue more than $883,000 by age 60, while the latter will accumulate roughly $480,000.

If people don't know those numbers or the necessity of saving for retirement, financial advisors should shoulder part of the blame, says Nicole Mayer, a partner at RPG Life Transition Specialists in greater Chicago.

"This is where the financial services model is broken," Mayer says. "We're not out there educating the American people as a whole on retirement. For so long, people had pensions and Social Security, and while Social Security is still here, pensions are long gone. We're responsible for funding our own retirements, roughly 80 percent of it."

Save. Save Some More. Save Even More

She encourages everyone to save, regardless of how low their income is. "Even if you just put $5 away per month, something is better than nothing. Never stop contributing to your retirement plan, because if better times come, you can always contribute more."

For many workers who feel they can't afford to save for retirement, or they're too late to the party, Mayer has a simple message: Start now.

She tells the story of two clients who burned through a six-figure nest egg because the husband and wife both lost their jobs during the Great Recession.

"They both just turned 50," Mayer says. As they finally found employment, "They made some tough choices, and some really rough cuts. Their picture does not look so grand. But it is what it is, and they're making the cuts now so that they will have something later. If they continue to save and save aggressively, they're going to be OK."
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