Massoud Metghalchi

Massoud Metghalchi

When it comes to retirement, many people get the same advice.

Invest all your retirement funds using your contribution and your employer’s match in a low-cost broad stock index as early as possible, and don’t look at it until you are 55 years old. Then gradually reduce the equity in favor of fixed income until approximately 50/50 at retirement.

Only 60 percent of American workers are saving for retirement. A study by Northwestern Mutual’s 2018 Planning & Progress found that the average amount Americans have in their retirement savings is $84,821. It is argued that the average American needs at least $800,000 in retirement to maintain their standard of living. “Retirement savings” refers to 401(k)s, IRAs, Keogh and other plans. Here are some reasons Americans have low retirement savings:

Voluntary: In the early 1980s, a few large employers started offering new saving plans to supplement their pension plans. Gradually, these new plans, 401(k) types, replaced defined benefits plans and have become the norm today; the workers bear most of the cost and all the risk of retirement. Most retirement savings plans are now on a voluntary basis with significant tax advantages, though participation is only 50 percent.

Gig Workers: A study by Intuit predicted that by 2020, 40 percent of American workers would be independent contractors – mostly temporary workers living paycheck to paycheck. Although 40 percent seems a bit exaggerated, these workers have lower pay, and two-thirds of them are less likely to have work retirement plans like standard workers.

Student loan, saving postponed: The average student loan debt for the class of 2017 was $39,400. Assuming they will pay this debt over 10 years at 4.9 percent, they would be paying $416 per month for the next 10 years instead of saving this amount each month.

Low return. According to Behavior Finance, investors sometimes make irrational decisions. Buying high and selling low is an example of this. This type of market timing by individuals has resulted in a low return of 2.5 to 3 percent for average 401(k) accounts. In addition, many 401(k) investors invest conservatively in treasury securities, which earn a small percentage, rather than investing in the stock market.

In summary, to become a millionaire at your retirement, here is a recipe:

1) Start contributing to your retirement very early.

2) Take advantage of your employer’s match.

3) Invest all contributions in a low-cost broad stock index.

4) At 55, gradually switch some equity to fixed income so that at retirement, you are close to 50 percent equity and 50 percent fixed income.

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Massoud Metghalchi is a professor of finance in the UHV School of Business Administration.

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