Retirement is a monumental life event for which people prepare for decades. It is marked by changes in virtually every area of one’s life, from work to relationships, and from health to self-identity. However, the most significant life domain relevant to retirement is money. Personal finances can make or break a person’s retirement and even dictate whether it happens at all. Today, personal finances are likely to be the most significant cause of anxiety for someone considering or close to retirement than any other issue. Why? In this blog post, I want to discuss four gaps related to personal finances that affect retirement preparation, producing anxiety and other adverse outcomes.
The Financial Knowledge Gap
For most people, retirement means stopping work and living off of the money they have saved and invested (in addition to social security benefits and pension, if applicable).
How much savings is the bare minimum required? How much will be needed for a comfortable post-work retirement? Obviously, the answers vary dramatically from person to person, requiring careful consideration of saving and consumption habits, lifestyle, health, and expectations about retirement, among other things. Once a target value or range is established, a path for how to get to that goal is also warranted. In other words, substantial domain knowledge, procedural knowledge, and personal knowledge of finances are required.
As a whole, Americans have a significant gap in financial knowledge. One 2019 study found that 56% of Americans don’t know how much they will need to save for retirement. Other studies have found that an even larger percentage have poor financial literacy and are unaware of their personal financial situation.
The Financial Resources Gap
Just as important is actual financial resources. An individual may deliberate and establish that they will need one million dollars when they retire at 67. However, such knowledge is only useful if they are able to earn and save consistently throughout their career to accumulate such a substantial nest egg. This is the financial resources gap, and for many people, it can be larger and more difficult to overcome than the knowledge gap.
Study after study finds Americans to have an inadequate amount of resources for retirement. In one recent study, 48% of older American households (headed by someone aged 55+) reported having no retirement savings at all. And the median retirement savings balance for this group was $12,000, far below any reasonable target value. Psychologically, too, this gap is far more difficult to close than the knowledge gap. It requires tough, long-term solutions at both the individual level, such as acquiring marketable skills, cultivating frugality and a savings habit, and at the social scale such as implementing policies to reduce income and wealth inequality.
Read the rest of the article at Psychology Today (blog)