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Turn the Retirement Savings Shortfall into a Windfall

Published on July 25, 2017

Forecasters from the World Economic Forum have reported that due to longer life spans and modest returns on investments (think stocks and bonds), the world is heading into a yawning gap in what people will need to retire in the future. Within 30 years—by the year 2050—the organization predicts there will be a $400 trillion retirement-savings shortfall; this dollar figure is more than five times the size of the global economy.

The figure is derived from the amount of money government, employers and individuals would need to provide each person with a retirement income equal to 70 percent of his or her annual earnings before leaving the workforce. It includes a $224 trillion shortfall among six large pension-savings systems around the world; they are the United States, the United Kingdom, Japan, Netherlands, Canada and Australia. The balance is from China and India.

The World Economic Forum warned that the savings shortfall is growing at a rate of $3 trillion each year in the U.S. and that it might climb 7 percent annually in China and 10 percent in India—countries with rapidly aging populations, growing middle classes and a higher percentage of workers in informal sectors.

Why the retirement-savings gap?

One reason is a shift by employers away from pensions to defined-contribution plans, such as 401(k)s and individual retirement accounts; these comprise more than half of all global retirement assets. The drop in pensions puts more risk (and pressure) onto the individuals to save and as we have often written about, millions of Americans are not saving enough for retirement (or at all). Many people lack access to the right savings options or lack the understanding of what’s available, according to the report.

Additionally, stock and bond returns that have been below historic averages in the past 10 years are contributing to the savings gap. Add longer life spans to this formula and the pressure mounts. Life expectancy has been on the rise for decades at this point, with many people living to 100 years old or older. The report cites a statistic that half of babies born in the U.S. and Canada in 2007 may live to 104 and to 107 in Japan. The World Economic Forum assumes retirement age between 60 and 70, so the retirement horizon will be long and expensive.

Close the gap through self-direction

There are steps governments can take to mitigate this to a certain extent; for example, the United States has raised the retirement age. Other countries, such as the Netherlands and Canada, have collective retirement systems for defined-contribution plans; this has helped workers pool risks and reduce fees. And individuals would benefit greatly from becoming more financially literate to better understand their savings options.

But rather than wait for an employer or the government to turn the situation around, or try to make up a shortfall in the stock market, savvy investors are taking control of their financial futures with self-directed retirement plans. These plans may include a wide range of alternative assets that are not allowed in typical retirement plans, and help build a more diverse retirement portfolio. If you already know and understand certain types of nontraditional investments, such as real estate, commodities, precious metals, equity funding and many more, you can close your retirement-savings gap with a self-directed IRA or (if your employer allows it) a self-directed 401(k). Next Generation Trust Company and Next Generation Services provide full account administration and transaction support for self-directed investors, and we offer client education about self-direction to ensure you are investing within stated IRS guidelines.

Read up on how you can supercharge your retirement savings through self-direction in our informative white paper, then open an account using one of our handy online starter kits.

Have a question about self-direction as a retirement wealth-building strategy? Contact our helpful team at Info@NextGenerationTrust.com or 888.857.8058 to get started.

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