How Saving for Retirement Might Backfire

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Saving for retirement is now the top financial goal of the vast majority of people who hold a job, according to a recent T. Rowe Price survey. That’s great news. We have a savings crisis in America and we’re finally taking it seriously.

Or are we? The same survey that found that 72% of workers regard saving for retirement as their top goal also found that relatively few are doing much about it. More than two-thirds of those with a 401(k) plan say they are contributing 10% or less of their pre-tax income. A stunning 29% say they have no idea at what rate they are contributing to their company-sponsored plan.

Saving 10% of annual earnings is widely considered to be a minimum target. T. Rowe Price advises saving 15% to 20%, beginning at age 25 and wrapping employer contributions into the calculation. But it isn’t just the low savings rate that is troublesome.

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The rise of retirement savings as a financial goal may have more to do with the fall from grace of other financial goals. As recently as 2008, paying down debt was Americans’ top financial New Year’s resolution. Depending on the survey, homeownership and paying for college also have outstripped retirement savings as a top goal.

Debt repayment has all but fallen off the map; in the T. Rowe Price survey, it ranks behind retirement saving, improving current lifestyle, and building an emergency fund. Maybe that’s because Americans generally have improved their personal balance sheets since the Great Recession, a good thing. According to Fed data, 39.4% of families say they have at least one credit card with a balance on it, down 6.7 percentage points from 2007.

But what about homeownership and higher education as financial goals? It’s possible that the deep housing slump, when millions lost their homes to foreclosure or saw their equity wiped away, took much of the luster off owning a house. A poll by the National Endowment for Financial Education found that retirement had replaced homeownership as the American Dream. This is a potentially troubling development. Could it be that Americans are turning their backs on homeownership just as the housing market begins to recover?

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Meanwhile, a debate rages over the value of a college education. Students graduate with an average of $26,600 in student loans and have bleak job prospects, according to the Project on Student Debt. Critics of higher education are getting an airing like never before.

Yet surveys continue to show a wide gap — $500,000 or more — between the lifetime earnings power of college graduates and those who do not get a degree. Are we discounting higher education just as the global economy begins to demand more — not fewer — educated workers?

If saving for retirement now tops our list of financial goals because Americans recognize the savings crisis and want to do something about it — that’s a gain. But if it has risen to the top by attrition, and without commitment, we may be headed for even more trouble down the road.