You may have read about how Americans, on average, are coming up short when it comes to building their retirement nest eggs. According to data from the Economic Policy Institute, the median retirement savings for all working-age households is $95,776. Data from the Federal Reserve is even bleaker, suggesting the average balance is closer to $65,000. Worse still, many households haven’t saved anything at all for retirement.
Find Out: This Secret IRS Loophole Lets You Reduce Your Retirement Taxes
Learn: 3 Signs You’re Serious About Raising Your Credit Score
The bottom line is that without a concerted effort, many Americans will reach retirement age without much to live on except Social Security. But the problem doesn’t stop there. If all of these Americans have underfunded retirement accounts that can’t sustain their lifestyles, how will they survive? Ultimately, the cost may have to be borne by working-age taxpayers. Read on to learn why.
How Big Is the Problem?
According to new research from the Pew Charitable Trusts, the growing retirement savings shortfall could reach as much as $1.3 trillion over the next 20 years. And while that will cause problems for those who aren’t saving enough, the effects will spread to federal and state governments, and ultimately to working taxpayers.
Those who don’t save enough to fund their retirements could end up relying on public assistance. This could create a wave of additional problems, from lowered personal consumption and standards of living to reduced tax revenues and employment rates. This burden would have to be shared by both governments and working individuals.
Retirement Savings: Here’s How Much Cash Baby Boomers Need To Retire in the Next 5 Years
How Much Might It Cost the Average Taxpayer?
Based on the Pew data, federal governments could shoulder an additional cost of $964 million by 2040, while states would have to spend an additional $334 billion. This combined $1.3 trillion in added costs would result in an additional taxpayer liability of $13,600 per household, according to Pew.
Note that this wouldn’t likely be covered in the form of direct “retirement funding taxes” on American households. But as the government is funded by the people, the costs will have to ultimately be paid by taxpayers in one form or another.
What Are Governments Doing To Prepare?
Fortunately, there seems to be a way out of this retirement funding shortfall, and at least 11 states are already on board with the program. According to Pew, if households could save an additional $1,685 extra per year for 30 years — or just about $140 per month — the entire retirement savings gap could be eliminated. As a consequence, the extra financial burden on governments and taxpayers alike would vanish, and the quality of life for retirees would improve.
As it can be hard to get Americans to save voluntarily, however, the suggestion from Pew and others is to implement automated savings programs for workers. Under this scenario, every worker would get an individual retirement account, and a portion of their earnings would be automatically contributed to the account. Although workers could opt out, studies have shown that those who are automatically enrolled in retirement plans are more likely to become savers, and their quality of life would improve in retirement.
What Can You Do To Prepare?
The first step in preparing for the retirement funding shortfall is to shore up your own finances first. Rather than waiting for automated retirement accounts to become the norm, make your own contributions to your 401(k) plan or IRA. If you can successfully fund your own retirement, then you won’t have to worry about either burdening the government or enduring a low quality of life during your golden years.
Remember that time is the key to long-term investment success, and the earlier you can start, the less it will cost you. Contributing just $450 per month to a tax-deferred retirement account for 30 years at a 10% rate of return will result in a nest egg of over $1 million. If you start even earlier, say at age 25, you’ll only need to sock away about $160 per month to reach that lofty $1 million sum.
Beyond saving for yourself, you should mentally prepare for changes that may be coming in terms of the retirement savings landscape. Auto-enrollment into retirement accounts may become the norm, but if it is not adopted, you may be paying higher taxes in some form down the road to help subsidize those in need. To avoid this scenario, you may want to take an active role in supporting governmental choices that boost retirement savings for all Americans.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Retirement Shortfall: How Much Will It Cost You as a Taxpayer?