The state of Americans retirement accounts is dismal is how ConvergEx's Nick Colas begins his critically important-to-read note on the reality that millions face. According to an early 2012 study by the Employee Benefit Research Institute, Colas notes only 58% of us are currently saving money for retirement and 60% of those that are have less than $25,000. Thirty percent have less than $1,000. Needless to say, its a far cry from the 8x-10x final earnings suggested by most retirement planners. So why are we so far behind? Americans arent exactly known for impressive savings habits, but that alone does not explain our poor preparation for retirement. Rather, a general lack of financial literacy, including basic understandings of savings growth and retirement income needs, superseding financial obligations, and basic behavioral finance biases keep us from putting cash away. But if we keep up at this pace, you can expect the ongoing political debate about Social Security to take on new and more strident tones.

Via Nick Colas (and Sarah Miller) of ConvergEx: Hope I Die Before I Get Old

Note From Nick: I dont remember anything about being 23. Or 24. Or, well, you get the idea. But understanding the financial decision making of this cohort is a useful exercise, especially when it comes to investing for retirement. Happily, Sarah is in the thick of these decisions and is, in fact, 23. It is pretty easy to see the long shadow of an important social problem from her narrative. If you think the debate over Social Security is raging now, just wait a few years. And now, over to Sarah

Ive been at ConvergEx for just over a year now, and Im happy to say Ive survived 12 months at my first job in the real world after college. Id like to think Im a bit smarter than I was when I walked in here last year. When I was given the employee handbook with all the options for healthcare, restaurant discounts, and pre-tax transportation contributions, I admit I had no idea what to choose. So I did what any 22-year-old Millennial child would have done: I called my parents. I figured my mother, who works in healthcare, and my father, the finance professional, would be the best advisors for these kinds of decisions.

After deciding on my options for healthcare and transportation, we finally came to the 401k something I had certainly heard of, but never really confronted. At 22, retirement savings was nowhere near the top of my priority list; and having just moved into New York City, I was not keen to tuck away part of my paycheck that could have been redirected towards some other expense. After all, wouldnt that money serve me so much better as a new pair of boots than it would in some account? Part of me is still inclined to say YES!. But knowing my parents probably knew more about this than I did, I followed their advice and put a whopping 1% of my paycheck towards the 401k.

Little did I know that only one year into my employment, at the age of 23, I would be farther ahead in my retirement savings plan than millions of American workers. According to a March 2012 survey by the Employee Benefit Research Institute for retirement confidence, the majority of Americans are vastly underprepared for retirement, with very few savings or even none at all. A few key takeaways from the report, which can be found here:

But why the lack of preparation? Several complementary reasons might reveal the answer:

1. Lack of financial literacy. Americans on the whole are not versed in the ways of financial planning. A study by Lusardi and Mitchell in 2005 found that less than half of a sample of US adults 50 and older was able to answer simple questions about inflation and compounding interest. Another study, by McKensie and Liersch in 2011, showed that a majority of adults misunderstood savings growth: they expected it grew linearly rather than exponentially, therefore underestimating the potential return a small investment could have over several years. When exponential growth of savings was demonstrated, real employees chose to save more for retirement (see the study here). To top it all off, 34% of those surveyed by the EBRI estimated they needed less than $250,000 to retire.

See the original post here:
Retirement: The Scary Numbers Behind The Soothing Lies