"There are times, Timothy, I wish I was Harry Potter". Being a Potter-head, my ears naturally pricked up. And of course, given that the speaker was the CEO of one of my oldest 401k clients, I listened intently. Mr. CEO is now five or ten years from retirement albeit he and I joke that he will leave his office feet first and probably still protesting even in death. His point was that he has not saved enough. He wishes he could go back in time to give his 25-year-old self a shake and tell him to save more.
While I was going to point out that it was Hermione who had the Time Turner and that even she did not go back decades but rather a few hours, that clearly wasn't his point. There are many reasons why an employee or entrepreneur might not have been able to save. Here are a few.
People often struggle to save for retirement due to a combination of psychological, financial, and systemic factors:
1. Psychological Barriers
Present Bias: People prioritize immediate gratification over future needs. Professor Dan Ariely of Duke University speaks eloquently about "immediacy" in his book "Predictably Irrational". And yes, Dan Ariely , I still struggle with eating healthy at 401k conferences. The donuts are right in front of me!
Lack of Financial Literacy: Many do not understand the importance of compounding or the amount needed for retirement.
Procrastination: The task of saving feels distant or overwhelming, leading to delays. Retirement is, for many young people, 40+ years away where as the here and now is front and center.
2. Financial Constraints
Insufficient Income: High living costs, debt, or low wages make it challenging to allocate funds for retirement. This can be a combination of the lack of a living wage (yes, I earned $12/ hour as a call center rep in 1991), high expenses, and other external factors. In my case, in 1991, I was finishing a full-time MBA, working part-time, and my blushing bride, new to this country, did not have a job yet. We were just trying to survive.
Unforeseen Expenses: Emergencies or healthcare costs often take precedence over long-term savings. 56% of Americans cannot afford a $1,000 emergency. That is concerning.
Job Instability: Irregular income streams make consistent saving difficult. Growing up, I dreamed of working at one company for 30+ years and in turn, receiving a pension and a gold watch. Instead, I was laid off-quit-fired four times in my first 14 years in Corporate America.
3. Systemic and Cultural Factors
Lack of Employer-Sponsored Plans: Not all workers have access to 401(k) plans or pensions.
Social Safety Net Assumptions: Some rely on Social Security, underestimating its limitations.
Cultural Attitudes: Certain cultures prioritize family support over individual retirement savings.
4. Cognitive Missteps
Optimism Bias: Belief that future earnings or circumstances will "catch up" later.
Misjudging Longevity: Underestimating how long retirement savings must last.
I am sure the list of reasons is even longer. And sadly, employees don't realize the issue until they are looking down the barrel of a looming retirement.
What are the solutions? Again, a few come to mind.
Saving more now. As we get older, it is possible we are making more money/ have risen higher in the professional ranks. Saving more is a distinct possibility subject to other demands (ie, kids in college, taking care of elderly parents). Still, saving more is limited as the money does not have as many years to possibly grow. Also, you may be constrained by 401k contribution limits and 401k testing requirements. In that case, consider non-qualified deferred compensation plans for the former and a safe harbor plan provision for the latter.
Cut expenses. This one is obvious but not necessarily possible. Some folks have advocated moving overseas to cheaper climes. Yes, that is possible but it also introduces issues of culture and language among other things.
Keep working. In the case of my CEO, that certainly seems like an answer. He enjoys running his own company and is clearly good at what he does. But this option is not always possible. Even in my early career, I saw that those who make more are easier targets for layoffs when expense cutting hits.
Choosing more aggressive investments. This strategy is the proverbial "Swing for the fences if you want to hit a home run". The obvious downside is that aggressive investments can have a higher chance of losing money compared to ones that are not as aggressive. What happens if you try to retire and your investments are down?
The Parting Glass
What I have advocated for nearly 35 years in this industry is to save as much as you can at every moment. Live within your means. Seek professional advice on choosing what investments might work for you given your circumstances. Alternatively, grab your Time Turner. How many turns will it take, do you think? Yours in Potter.