Why the average family has only $5,000 for retirement

Too many Americans are ignoring their retirement savings, and that's a big problem. According to the Economic Policy Institute, the U.S. median retirement savings stands at $5,000.

There are myriad reasons for such an alarming, and inadequate, number, and we'll get to those in a moment. But the EPI points the icy finger of guilt at the rise of the 401(k) plan.

[See: How to Save for Retirement on Less Than $40,000 Per Year.]

"The shift from pensions to 401(k)s has failed the majority of American workers and disproportionately harmed disadvantaged groups," says Monique Morrissey, an economist with the EPI.

She notes the median family between the ages of 32 and 61 has only $5,000 saved in a retirement account, while the top 1 percent of families has a million dollars or more.

"For many groups – lower-income, black, Hispanic, non-college-educated, and unmarried – the typical working-age family has no savings at all in these accounts," the EPI reports.

"Our retirement system used to reduce inequality, but since the shift to 401(k)s it has only served to magnify it," Morrisey says. "These accounts are accidents of history that were never designed to replace pensions, and it should come as no surprise that they have not worked for the majority of people. Decades after the rise of 401(k)s, pensions are still far more important to retired people. To make sure Americans are prepared for retirement, we need to defend existing pensions and expand Social Security."

That's one way to look at the issue, but certainly not the only way. Part of the problem is too many Americans are kidding themselves about retirement.

"I often run into to folks that say, 'Well if I am not ready to retire, I will just continue to work,'" says Mike Lynch, vice president of strategic markets for Hartford Funds. "The reality is, very few of us can control how long we work."

With that toxic outlook, one of three things may happen down the road, Lynch says:

  • The person's health declines, and he or she has to leave the workforce early.
  • The spouse's health declines, and the person is forced to leave the workforce to care for his or her spouse.
  • The person's company's health declines (due downsizing, units/division sold off, or location changes, most likely), and the person is forced to leave the workforce prematurely.

To right this sinking retirement ship, Lynch advises lax long-term savers to ask – and answer – three key questions: "Where will I live in retirement, who will I spend my time with and what will I be doing?" he says. "Many of us haven't really sat down and thought about our retirement. Also, what will fill up my day? Will I be living where I currently reside, and can that home support me, and can I live there comfortably as I age? "

[See: 10 Long-Term Investing Strategies That Work.]

Pondering these questions "may help us start to realize that to do these things, I need to save more," he says.

In addition to changing your outlook on your future, taking small, actionable steps can make a big difference over the long haul.

"Most people who have less than $5,000 saved are probably living paycheck to paycheck," says Rocky Lalvani, a retirement specialist, in Harrisburg, Pennsylvania, who has saved a seven-figure amount for his own retirement. "The reality is they probably know someone who makes just a little less than they do and is still as happy as they are. If you start small, just 1 percent of your income into a 401(k) or a few dollars from every paycheck into a savings account you will never miss the money. The key is to increase that savings amount every few months, and especially when you get a raise, because you won't miss it."

Adds Lalvani, "With a pay-yourself-first mindset - you will be able to increase your saving over time to a very large percentage of your income. Increasing your savings rate by 2 percent a year will end up being a 20 percent savings rate in 10 years, and you won't miss the money."

Another big part of the problem is that, as financial consumers who need to save more and spend less, we can't get out of our own way.

"Americans have a big problem with their immediacy bias, a tendency to prefer immediate benefits over longer term gratification," says Stephen Rischall, a financial planner with1080 Financial Group, in Sherman Oaks, California. "This is true of baby boomers and appears to be even more so the case with younger generations like millennials (Rischall is a millennial and so are 30 percent of his clients). "Because of this short-sightedness, many Americans are way behind on saving enough to live comfortably through retirement."

Rischall strongly advises setting up automatic monthly contributions from your bank account into an individual retirement account.

"If you want the added benefit of an income tax deduction choose a traditional IRA," he says. "Or, if you feel it's better to forgo the tax deduction for tax free withdrawals in future years choose a Roth IRA."

Another tip: If your employer offers a match using your retirement plan at work, be sure to contribute at least enough to receive the full match, Rischall recommends.

Obviously, at $5,000 in savings, millions of Americans have an uphill climb in funding an adequate retirement. That's why it's vital that workers behind on their retirement savings need to star playing catch up – and fast.

[Read: The Financial Benefits of Living With Less.]

Otherwise, there's a good chance you get spend a good deal of your golden years working under some golden arches.

10 Images That Will Motivate You to Save for Retirement

Copyright 2016 U.S. News & World Report

Read Full Story