Teresa Ghilarducci
Source: Teresa Ghilarducci

Psychologists tell us that shame can lead to despair, depression and weakness. All are bad states to be in when planning for retirement, but unfortunately shame is exactly what our retirement system is built on.

The bright, confident and telegenic financial experts tell us we should be saving 8 to 17 times our salaries​ for a comfortable retirement. That means if you are in your late fifties and earn $80,000 a year, you should already have half a million dollars in your retirement account. This figure is not based on reality. In fact, it's a shaming technique: hold up an ideal and tell people they failed. These experts' only advice is to listen to the master, preferably them. 

The majority of people in the U.S. have next to nothing in their retirement accounts. Excluding the country's top 10 percent, those who earn over $420,000 on average per year, the median retirement account balance for people aged 50-64 is $60,000. It's about one times their salary, not 8-17 times. 

Meanwhile, the top 10 percent have about $600,000 in their retirement accounts. Why do average workers not have sufficient funds in their retirement account? Are they bad people? Or do we have a bad system? Most of these sparkly financial experts agree that people must be making bad choices and are prone to mistakes. In other words, people are weak and the experts are strong. And it just so happens that the experts' solution is that people should listen to their advice. It's a solution fueled by shame.

Instead, I point to the country's broken systems - both retirement and labor - for the reasons why the average individual does not have a healthy retirement account.  The American pension system has failed the average worker and wages have barely increased over the last 30 years, making increased savings almost a nonstarter. 

Despite the grim retirement situation many workers find themselves in, there is some good news. People do have power, and there are steps the average worker can take to ensure they'll have a secure retirement:

1. Spend 90 percent of your income. Fight envy. Get some stingy friends, enjoy cheap diners, and fall in love with your stuff all over again. Don’t date, court, or buy new things. Leverage the strength of peer effects on spending by picking the right peers.

2. Contribute the maximum to your 401(k) or Individual Retirement Account and only invest in indexed funds.

3. Plan to spend down your retirement account in your sixties and work full and/or part time until age 70, so you can collect your maximum social security benefits. (However, don’t do this if you have a terminal disease or you will be officially poor if you don’t collect Social Security before age 70.) Waiting to collect Social Security until age 70 works for the majority of Americans, as most earn or get income into their sixties and typically live past their late seventies.

Let’s say a worker earns between $50,000 and $60,000 per year. And let's say this same worker saves 10 percent of the income each year (an accomplishment, the national savings rate is about 2 percent) between the ages of 37 to 67 (not 70) while earning a safe 3 percent return. This worker would have $242,000 in her or his retirement accounts. If this amount were annuitized to provide income for 20 years of retirement, our average worker would receive about $10,000 a year. This could pay a senior’s rent for a small apartment in the cheapest American town, but it's not enough to maintain a middle-class lifestyle for a long retirement period.

I suggest people use their savings to delay collecting Social Security until age 70. The $242,000 from our example may not be enough for a secure retirement overall, but it is enough for a middle-class retiree to live on while she or he delay collecting the Social Security benefit until age 70. A middle income worker could live on $242,000 for three years, between ages 67 - 70, and then collect over $5,200 per year in extra income for the rest of their life, adjusted for inflation, by starting to collect Social Security at age 70. If our worker collects Social Security at age 67, he or she would get $1,591 each month for the rest of her life rather than $2,029 per month, an increase of $5,256 per year. ​​A larger benefit is the goal of any retiree and delaying Social Security collection will achieve that result.

However, this strategy only works if Congress and the President resist calls to cut Social Security benefits. Polls report cutting benefits to be unpopular across the board. According to a national survey of 801 Americans age 25 or older, three-fourths of people who identify as Democrats and two-thirds of people who identify as Republicans support strengthening Social Security. However, the political push to increase the retirement age remains a real threat, even though it would hurt retirees by reducing monthly benefits collected every year prior to the maximum benefit age. 

Bottom line: It’s a half myth that people can’t save enough for retirement. In the short term, people might not be able to save the amount experts recommend, but people can strategize to delay collecting Social Security until they receive the maximum benefit at age 70.​ In the long term, our elected representatives need to work together to fix our pension system and ensure future Americans access to a dignified retirement. ​

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