Workers Put Paying For Child’s College Ahead Of Retirement Savings

American workers have found another escape hatch to avoid contributing to their retirement savings and at least 33 percent of them say they would voluntarily take it.

The LIMRA Secure Retirement Institute released a study that said one-third of U.S. workers already have reduced or would be willing to reduce contributions to retirement savings to help their children or grandchildren pay for a college education.

“Attending college has morphed from a privilege into a necessity for so many,” Michael Ericson, author of the study, said in a press release. “With the average student loan approaching $30,000, people have been forced to shuffle around their financial priorities and obligations.”

Ericson said that 40 percent of workers with a child or grandchild said they felt obligated to foot the college bill. A Federal Reserve Board briefing from April of 2015 demonstrated how true that was. The Fed said that borrowers over the age of 60 are fastest growing segment of student loan debt. It has increased 850 percent in the 10-year period between 2004 and 2014.

Retirement Contributions Low

The LIMRA survey’s results underscore the problem people have funding a retirement plan to supplement what they will receive from Social Security. Only 64 percent of American workers said they have saved any money at all for retirement, according to a 2014 survey by the Employee Benefit Research Institute (EBRI). Experts tell people to put 15 percent of every paycheck toward a retirement account, but that advice has largely been ignored.

The EBRI study said that 60 percent of Americans have less than $25,000 in retirement savings, meaning they will be counting heavily on social security benefits to carry them through their retirement years. The consequences for their lack of available resources will be felt by families and government organizations that have to step in and provide financial support.

The news does not surprise most financial advisers, who know that more than 10,000 people a day are retiring, many of them without enough in savings to maintain the lifestyle they had during their working lives. The financial advisers have been telling people for years to get started early with retirement savings and be consistent with contributions, but that advice has fallen on deaf ears.

Almost 20 percent of the people between the ages of 55 and 64 said they zero money saved for retirement and no pension. At the other end of the scale, almost 60 percent of the workers age 18-29 said they don’t even think about retirement, let alone do any planning for it.

Financial Literacy An Issue

Lack of resources and awareness of retirement plans were the major reasons given for the disturbingly low participation. Many people in the surveys said they simply didn’t have enough money left after taking care of monthly expenses and even if they did, retirement savings wasn’t a priority.

However, another study pointed at two other areas as the real source of the problem, regardless of age: Procrastination and financial illiteracy. Plenty of people say they are going to start contributing to retirement plans, but constantly put it off in favor of going on a vacation or buying a new car or home.

Those who do devote some portion of their paycheck to retirement savings, don’t get as much benefit because many don’t understand how retirement plans work, especially the power of compound interest.

Companies report a record number of employees participating in 401 (k) plans, but most only contribute the default rate of three percent of their paycheck. Since most company plans match up to six percent of contributions, that means employees are leaving three percent of free money on the table. That comes to an average of $1,336 a year per employee or about $24 billion of matching money that doesn’t reach retirement savings accounts.

The consequences of retirement savings shortfalls could have severe impact on the economy as the Baby Boomer generation pours through the retirement gates. Many could become financial burdens on their families and government agencies, while others will have to remain in the workforce well beyond the time they expected to retire.

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

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    Sources:

    1. Ericson, M. (2015, September 28) LIMRA Secure Retirement Institute: Many Would Put Off Retirements to Help Pay For College. Retrieved from http://www.limra.com/Posts/PR/News_Releases/LIMRA_Secure_Retirement_Institute__Many_Would_Put_Off_Retirements_to_Help_Pay_For_College.aspx
    2. Haughwout, A., Lee, D., Scally, J., van der Klaauw, W. (2015, April 16) Press Briefing on Student Loan Borrowing and Repayment Trends, 2015. Retrieved from http://libertystreeteconomics.newyorkfed.org/2015/04/just-released-press-briefing-on-student-loan-borrowing-and-repayment-trends-2015.html#.Vh04FvlVikq
    3. Reeves, J. (2015, May 9) Americans struggle to sock away retirement savings. Retrieved from http://www.usatoday.com/story/money/personalfinance/2015/05/09/ebri-retirement-401k/26466299/
    4. Miller,K., Madland, D., Weller, C. (2015, January 26) The Reality of the Retirement Crisis. Retrieved from https://www.americanprogress.org/issues/economy/report/2015/01/26/105394/the-reality-of-the-retirement-crisis/
    5. NA, (2015, August 20) The Real Reasons Americans Aren’t Saving Enough for Retirement. Retrieved from http://time.com/money/4003825/real-reasons-not-saving-for-retirement/