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In traditional societies, younger generations take care of elderly family members. In affluent modern societies, people at all income levels are expected to have sources of retirement income to allow them to retire and live independently.

Here in the United States, we look to the Social Security system to provide a portion of our retirement income.  But we are frequently reminded that Social Security benefits won’t be enough for a “financially secure” retirement.  Social Security benefits currently replace about 40 per cent of a worker’s income.

Is the average American up to the task of saving and investing for 30 years or more, and if so, will our savings be enough to maintain our household and standard of living?  Consider the amount commonly recommended by financial advisors – 70 per cent of pre-retirement income for 20 years – and it’s easy to see how even the most diligent savers will not meet that goal.

For employees who participate in 401(k) plans, long-term contributions and good investment choices are the keys to growing the value of the account.  Employees who hold jobs for short periods of time frequently “cash out” their accounts after leaving a job instead of re-investing the funds in another 401(k) or IRA.  Various other factors cause 401(k) holdings to dwindle, including hardship withdrawals and loans that are not repaid.

The value of 401(k) and other investment accounts rise and fall based on the individual’s choice of funds and the overall health of the economy.  Some employees and retirees lost a significant portion of their retirement nest egg due to the decline in value of most mutual funds, which was steepest in 2008, but has not fully recovered.

And of course, many people do not have a pension, 401(k) or IRA. We may be focused on shorter-term goals, such as owning a home, sending our kids to college.  Or we may be barely getting by with just enough income to survive, and finding it impossible to save at all.

In any situation where retirement savings are minimal (or non-existent), excessive debt is often a handicap to any form of saving.  Studies have shown that higher levels of household debt correspond to inadequate retirement savings.[1]

If you are age 50 or over, now is the time to reduce debts as much as possible and prepare for retirement.  If you are already retired, you must determine how much debt you can realistically repay.  It is not necessary to sacrifice necessities such as food, health care and medicine to pay your debts.

[1] Cavanaugh and Sharpe, Journal of Financial Counseling and Planning, Vol. 13(I), 2002

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