August 31, 2021
In general, we Americans are not great savers. As of the end of 2020 the personal savings rate[1] was 13.7%. According to SmartAsset.com, the median retirement savings among all adults, measured in 2019, was $65,000. It is not surprising then that 64% of Americans don’t believe, or aren’t sure, that they are saving enough to retire.
Therefore, it is vitally important to encourage your clients to start saving, or continue to save, for retirement despite the change in circumstances that divorce may cause. In many divorces one or both parties will experience a negative change to their financial situation. This could be a result of paying support or it could be from losing the dual-income status of being a couple. Either way, when faced with less income the person is going to have to reduce expenses. Often, savings are one of the first outflows to go.
But in terms of the long-term welfare of the client, saving money for retirement should be the last expense to be cut. Every dollar saved today has much more impact than the same dollar saved next year, thanks to the effect of compounding returns.
Ethan is 35 years old and plans to retire at age 65. If he saves $500 per month from today until he retires, assuming he earns a 6% return, he’ll have $504,768. But Ethan feels strapped for money and decides to postpone saving for 5 years, when he’s in a new job and earning more money. Now he feels much more financially secure and decides to put away that $500 per month for 25 years. It earns the same 6% rate of return, but at the end of 25 years Ethan has only $348,229. That’s 31% less than he’d have if he had started at age 35! If Ethan wants to reach the same $504,000 balance, he’ll have to up his savings to $725 per month, almost 50% more per month.
Even if an individual cannot save as much as they would like to, any amount is helpful, and helps to encourage the discipline or habit. Also, there may be ways to leverage their savings:
A Certified Divorce Financial Analyst can help your client adjust their cash flow to address important goals, such as retirement.
[1] https://www.statista.com/statistics/246234/personal-savings-rate-in-the-united-states/
