Here's Why the Middle Class Can't Get Ahead in Retirement

It's no secret that Americans aren't saving enough for retirement, and a small bank account could leave you struggling in your golden years. Here are a few reasons why middle America can't seem to get ahead in their savings.

1. Wages have fallen

You aren't imagining things if life feels more expensive. Between 2007 and 2014, four out of five workers' earnings and benefits stayed the same or decreased, according to the Economic Policy Institute (EPI). When your salary can't keep up with inflation, you have a few options:

  • Ask for a raise. While less than half of workers ever ask for a raise, three quarters of those who do are rewarded with a pay bump, according to a PayScale study. You have nothing to lose by breaching the subject, and your boss might be more agreeable than you realize. 
  • Change jobs every few years. Full-time workers who changed jobs saw their paychecks increase an average of 4.5%, and 5% or more in certain regions, according to the ADP Research Institute.  
  • Factor in bonuses. A PayScale report found that 81% of top-performing companies gave bonuses to their employees in 2015. If yours isn't among them, it's time to find a job that can help you funnel more money into long-term savings.
  • Consider the telecommuting job market. Nearly 3% of the U.S. employees work from home at least part-time, a 115% increase since 2005. The job market is changing, and telecommuters save an average of $4,000 a year in transportation and clothing costs alone, according to a FlexJobs study. Talk to your boss about the possibility of working remotely, or consider pursuing a career that allows you to utilize your home office. Lowering your work-related expenses means freeing up more cash for your retirement accounts.

2. Too much debt 

The average debt for middle-class households is 122% of annual income, which means that most people are only one paycheck away from a financial crisis. Living in a state of debt makes it impossible to plan for the future, especially if you can't see beyond next month's expenses. If this sounds familiar, overhaul your finances with a few simple steps:

  • Create a budget to learn if you're spending more than you earn, and aim to cut 10% across the board in flexible expenses like utilities, food, and entertainment.
  • Eliminate compounding debt like credit card balances by paying more than the minimum each month. You might even ask your issuer to lower your interest rate. 
  • Open a savings account for emergency use only. Nearly 70% of people have less than $1,000 cash on hand, and a safeguard will help you avoid taking on more debt, or worse, dipping into your retirement funds when a crisis occurs. 

3. Limited access to 401(k) plans

While the majority of full-time employees (69%) have access to an employer-sponsored defined benefit or defined contribution plan, only 44% of part-timers have the same benefit. More than one-third of all workers are left out of the equation, according to the Pew Research Center. While you don't need an employer-sponsored plan to save for retirement, it's a good idea to consider finding a job that provides this benefit, which can help you save thousands more over time.

If you aren't willing to change jobs, you can still open an individual retirement account (IRA), which allows you to contribute up to $5,500 a year, or $6,500 a year if you're over age 50. Like a 401(k) investment, an IRA allows your money to grow with compound interest until retirement, with or without employer support. At a rate of 7% growth, a $5,500 annual investment will grow to around $560,000 in 30 years, which is math you can't afford to ignore.

4. Limited interest

You're probably not interested in the finer points of retirement planning, and science says it's not your fault. Researchers at the University of California, Los Angeles conducted brain scans and found that we have trouble imagining our lives in the years ahead. In other words, you're likely to treat your future self like a stranger. This type of depersonalization makes it difficult to resist the today's temptations, practice self-control, and make good choices (like saving money) that will benefit you in the future.

Fight your brain's shortsighted nature by considering the harsh truth about retirement: Even if you save $1 million, it provides less annual income than you might think. Remember that compounding interest is a valuable tool, and the money you invest today will have more time to grow.

There are a lot of factors working against the middle class, but there are also plenty of opportunities for self-improvement. Take stock of your habits and resources and make positive changes. Saving for retirement isn't easy, but it is possible.

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