As we enter into fall, many people look forward to the excitement of Halloween. The joy of seeing kids in costumes and the thrill of haunted houses and scary movies is all part of enjoying the season. To help you get into the spooky spirit of the holiday, here are three haunting facts:
1. The Spine-Chilling Reality of Social Security
You’d have to be living under a rock to not know that the future of Social Security is in severe jeopardy. The effect of so many Baby BOO-mers entering retirement is two-fold. First, there will be fewer workers funding Social Security. In 1950, each retiree’s Social Security benefit was paid for by 16 workers. In 2010, it was funded by a mere 3.3 workers, and by 2033, it is projected that there will be only 2 workers to pay for each retiree, making it impossible for the system to properly function.
Second, as more and more people retire, the depletion of Social Security’s trust funds will dramatically accelerate. It is currently projected that Social Security will exhaust its reserves in 2035.
The lesson is that if at all possible, you must create another source of income during your retirement years. For some, it means working longer. For others, it simply means finding an investment strategy that focuses on generating cash flow.
2. Skeleton-like Savings
According to the Bureau of Economic Analysis the personal savings rate has been on the decline for the past 30 years. Americans are saving less than half of what they were in the 1970’s and 1980’s.
To put this in perspective, consider the latest statistics from EBRI. Almost half of Americans have saved less than $25,000 for retirement. Worse, 26% of American workers have less than $1,000 in retirement savings.
Although it’s not the only factor, how much you have saved is the primary determinant of how successful you will be at funding your retirement. The message is clear; start early and save, save, save!
3. The Grave Robbing of 401(k)s
What do you do when you’re faced with flat wages and trying to make ends meet? For millions of Americans, the choice has been to raid their 401(k). Research indicates that about one in four American workers participating in a 401(k) tap into it to pay for current expenses. Over $70 billion is being withdrawn annually out of 401(k)s for non-retirement needs.
If you’re younger than 59 ½, you will pay both taxes and a 10% penalty when you withdraw 401(k) funds. You will also be suspended from making any elective deferral contributions for six months, losing the opportunity to save and in many cases, missing your employer match.
But you think, “I’ll pay it back and catch up, so it’s no big deal right?” Wrong! Even if you pay it back, you are forgetting about the time value of money. By withdrawing those funds, you are cheating yourself out of the opportunity for compounding growth. What’s even more staggering is that many people take out more than one loan. The long-term impact of this can translate into a significant negative impact on your retirement savings.
If you find yourself considering taking money out of your 401(k), please take the time to understand the possible financial consequences of this decision. Or better yet, just don’t do it.
The bottom line is that your retirement savings should be sacrosanct. When you withdraw money from your retirement plan, you are stealing from the future you and undermining your retirement security.