Americans Know They Need to Save for Retirement. So Why Aren’t They?

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It’s no wonder we’re supposed to spend most of our lives saving for retirement.

It’s the endless vacation we’re working toward, the carefree decades we can spend in exotic locales (or Florida!), reading on the beach for hours on end.

But at the rate most of us are going, we’re never going to make it there.

Research shows that 75% of Americans nearing the retirement age in 2010 had less than $30,000 in their retirement accounts. If that doesn’t sound like enough money to live on without a paycheck for a year–let alone decades–it isn’t.

So why haven’t we been saving enough money for retirement?

The easy answer would be that people don’t have any spare room in their budgets—or that recent years in the stock market have wreaked havoc on balances.

But a new study from the asset management firm State Street Advisors shows that Americans actually do have extra room in their budgets. They even know that they should be saving up more money for retirement. Yet, something is keeping them from putting their money where their mouth is, and it’s called the “action gap.”

How the Action Gap Affects Retirement Savings

Here are the numbers: 83% of workers said they could afford to cut their household costs by 5% in order to save for retirement. Others can afford to save even more: 64% of workers say they could afford to cut costs by as much as 10%.

But Americans aren’t putting two and two (let alone that 10%) together and just saving for retirement because they don’t know how: 78% of participants in the study said that they know it’s important to determine how much to save for retirement, but only 33% knew how to go about doing so.

Retired Couple

This is what State Street calls the “action gap,” and the survey included more stats demonstrating just how it plays out:

  • 67% of participants know they should adjust their portfolio over time but only 30% know how to do it.
  • 82% know their savings will need to last a lifetime but just 28% know how to make that happen.
  • 40% are uncertain about the differences between common investments such as stock index funds and actively managed stock funds.
  • More than half of survey respondents do not know what target date funds (TDFs) are.

End result? Instead of investing the “extra” money they have in their budget into retirement accounts, most people just do “nothing” (code for “spending it”).

Fixing the Action Gap

Since it seems the action gap stems from a knowledge gap, more education is one way to address it: The Principal Financial Group recently determined that an efficient way to teach adults about managing money is through one-on-one financial counseling sessions at work.

Among employees who attended such a session in 2011, 80% took a positive step, such as increasing retirement savings and agreeing to automatic increases in the future. They also contributed more from their paychecks and were ten times likelier to agree to automatically increase their contributions with each raise than those who did not receive one-on-one counseling.

In an effort to boost retirement plan participation, many companies have also adopted “opt-out” 401(k) plans that automatically enroll employees in 401(k) programs, forcing them to opt-out instead. Companies with practices like these have much higher rates of retirement plan participation, at almost 90%, compared to 20% for someone without that caveat.

But if your company doesn’t auto-enroll you, what should you do?

Get on the Road to a Comfortable Retirement

We talked to LearnVest Certified Financial Planner® Stephany Kirkpatrick about the action gap, something that she’s seen before as a retirement counselor. “People have the money, but they have a fear of the unknown,” says Stephany, “It’s this fear that paralyzes our ability to start with the bare minimum.” Here’s what she recommends you should do to slay your fears and actually save for retirement:

  1. Know your target total savings amount: You can’t make your savings last if you don’t know how much you need. Find out with this calculator.
  2. Know how much you need to set aside each month in order to reach your savings goal: The above calculator will also tell you this amount. If you’re not sure how to find extra room in your budget, learn how to trim expenses with our Cut Your Costs Bootcamp.
  3. Learn how to invest: “Investing is your friend—it helps you combat inflation and grow your assets, so learn to love it,” says Stephany. Also, you’ve got a head start, since a study found that women tend to be better investors than men.
  4. Pick a mentor: Ask someone who is nearing retirement what her retirement savings mistakes were and learn from them. Remember: Time is on your side.
  5. Take advantage of free resources: Talk to the HR department at work to see what types of seminars and counseling sessions are available through your company. 
Finally, start with other easy-to-access free resources–the following LearnVest articles:
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