April is Financial Literacy Month and everywhere you turn you see depressing statistics. Data taken from the Survey of Consumer Finances from the Federal Reserve Board shows that the median retirement savings for heads of households between ages 55 and 64 is a paltry $100,000. To put that into perspective, experts believe that even with Medicare, seniors may need up to $350,000 to pay medical bills. Collectively, the majority of us aren't even saving enough to cover our medical costs in retirement, much less fund a reasonable lifestyle.
There is a perfect storm exacerbating an already disastrous retirement income crisis. Although this past year witnessed a slight decrease in longevity for Americans, the long term trend is that we are living longer due to medical advances and positive lifestyle changes. But, living longer has implications for retirement savings. Simply put, when we live longer we need to save more.
The move from a defined benefit pension plan to defined contribution plans has a couple of significant implications. First, each of us is responsible for our own retirement savings plans. Defined benefit plans are managed by financial experts, while defined contribution plans are managed by each of us individually. It seems odd that most Americans consult a doctor when they are sick and a lawyer when they get into legal problems, but somehow go it alone when making financial decisions. Secondly, defined benefit plans are able to pool risks, managing for the benefit of a pool of individuals. Some people die young and others live long lives, and those offset each other. In a defined contribution world, each person must save for a potentially long life so as not to run the risk of outliving savings.
The ultra-low interest rate environment we find ourselves in means that returns to traditional fixed income asset classes has been low and will likely remain low for the foreseeable future. The clear message is that those saving for retirement simply aren't realizing the levels of returns that were historically available.
One of the biggest problems with the lack of financial literacy in this country is that people confuse "investing" with "trading." One of the big discount brokerage firms is running an advertising campaign that offers "three months of free trading" and "up to 700 free trades." No one needs to make 700 trades in three months. In fact, I doubt that Warren Buffett has made 700 trades in his illustrious career. Trading involves making short term bets on the direction of asset prices. Investing involves taking a long term perspective, relying on future economic growth and prosperity.
One isn't going to trade his or her way to a prosperous retirement. But, you can invest your way to retirement bliss via a disciplined process of dollar cost averaging -- committing funds whether the market is up, down or sideways. Such a strategy takes time and patience, and each seems in short supply today.
Financial literacy is in short supply and the lack of it has real costs.