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Debt, Housing Costs Make It Harder to Save for Retirement, Americans Say

Nov. 12, 2019
Investing, Investing Data
Housing Costs Holding Americans Back From Boosting Retirement Savings
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Advice encouraging Americans to skip fancy cups of coffee and use the money to enhance savings continues to make the rounds on various platforms – and people are paying attention. According to a new NerdWallet survey, more than 7 in 10 Americans (72%) think that buying a coffee every day could have an impact on a person’s ability to save for retirement, and about a quarter (23%) think this could have a major impact.

While an expensive latte habit could affect retirement savings, our analysis shows that choosing to purchase a slightly less expensive home instead of skipping that daily latte could have more than four times the impact on your retirement savings over 20 years – a difference of more than $137,000.

In a recent online survey of more than 2,000 U.S. adults, commissioned by NerdWallet and conducted by The Harris Poll, we asked Americans about the necessary and unnecessary expenses that are holding them back from saving for retirement. We also asked them about the financial advice they find annoying and the financial advice they follow.

Key findings

  • Debt payments (44%) and housing expenses (43%) are two of the biggest essential expenses holding Americans back from saving money for retirement, according to our survey. NerdWallet’s analysis found that someone could earn a return of around $84,000 if they purchased a house in their budget versus stretching to purchase a more expensive home and invested the difference over 20 years.
  • The top non-essential expense that Americans say is a barrier to their ability to save for retirement is dining out (41%).
  • Roughly 1 in 5 Americans (18%) say “make your daily coffee at home instead of buying it from cafes/restaurants” is one of the most annoying pieces of financial advice, but more than 2 in 5 Americans (42%) follow it.

Necessary expenses make it hard to save for retirement

The top two essential expenses that are among the biggest barriers to Americans’ ability to save for retirement are debt payments (44%) and housing expenses (43%), according to our survey. Debt varies from person to person, but according to NerdWallet’s household debt study, the average household with credit card debt owes $6,829, as of June 2019. Those with auto loans owe an average of $27,708 on these loans, and those who have student loans owe $46,783, on average, for that type of debt. Even minimum payments on these balances can make up a large part of many budgets.

Housing expenses can also keep Americans from saving for retirement. The household debt analysis shows that the average household with mortgage debt owes $188,903, as of June 2019. According to the U.S. Census Bureau, median gross rent hit $982 as of 2017. Those living in large cities may have much higher housing costs. Here are the other necessities holding Americans back from saving more for retirement:

 

Two other essential expenses that Americans say impede their ability to save for retirement are food and child care. Close to a third of Americans (31%) say that food spending is one of their biggest barriers to saving for retirement, while 18% of Americans with children under 18 living in their households say this about child care costs.

About 1 in 14 Americans (7%) aren’t currently saving for retirement and don’t plan on doing so. Even more concerning, 11% of Gen Zers (ages 18-22) say this. In a previous NerdWallet survey, we found that more than one-third of retired Americans (36%) say it wasn’t their choice to retire when they did. Whether someone plans on retirement or not, it’s a good idea to save so they have options when they reach retirement age.

What you can do: Reduce big expenses to ramp up retirement savings

Some of the costliest expenses in many budgets are housing and transportation costs, along with child care for those with children. And while they are harder to trim immediately than daily lattes or takeout meals, aim to reduce these expenses to free up more money to save for retirement.

“These major expenses are more difficult to reduce, as they sometimes require broad lifestyle changes,” says Arielle O’Shea, NerdWallet’s investing and retirement specialist. “But if you’re struggling to save or feeling like you can’t keep your head above water, they also have the biggest impact. Reducing your spending in these areas can quickly turn your financial situation around.”

In our analysis, if you’re in the market to buy a home, choosing one that comfortably fits your budget rather than one that’s a stretch can make a big difference in your retirement account, provided you invest that saved money. You can also save a lot by buying cars that are 3 years old instead of brand new ones. Check out NerdWallet’s calculator that shows how much reducing or eliminating different expenses – or adding extra income – can add to your retirement savings over 20 years.

“If you’re not able to cut these large costs now, make a plan for when you can — and what you’re going to do with that money,” says O’Shea. “That might mean refinancing your mortgage or downsizing at some point, deciding now that your day care dollars will go toward retirement once your children start public school, or boosting your IRA contributions when you pay off your auto loan.”

Non-essentials have smaller effect on retirement savings

Even though the big wins, like reducing housing costs and adding income sources, may make the biggest difference in many people’s retirement savings, reducing some non-essentials can help ramp up savings as well.

According to our survey, the top non-essential expense that is one of the biggest barriers to Americans’ ability to save for retirement is dining out (41%), followed by entertainment (26%) and subscription services (22%). Here are other non-essentials that are keeping Americans from saving for retirement:

 

One in 5 Americans (20%) say that vacation spending is a non-essential expense that is one of the biggest barriers to their ability to save for retirement. Less than 1 in 10 (8%) say ride-sharing services are among the biggest barriers, but this is more likely for younger Americans – 11% each of Gen Zers and millennials (ages 23-38) say this, compared to 5% of baby boomers (ages 55-73).

What you can do: Cut out some small stuff, too

Money is a tool, and while you should prioritize your immediate necessary expenses and your retirement savings, you should also enjoy it. So spend on the things that are important and enjoyable to you. Reevaluate the rest.

“This is all about mindfulness — you work hard for your money and you want to ensure those dollars are going toward things and experiences that matter to you,” says O’Shea. “That starts with knowing where your money is going.”

You may have expenses in your budget that no longer serve you, and that money may be better invested to pay for your future lifestyle. If your daily latte is important, drink it! Instead of depriving yourself of a small thing you enjoy, focus on the big wins first, then cut out little stuff that you no longer care about, like an unused subscription service.

Many Americans annoyed by typical financial advice but still follow it

Whether for retirement savings or not, just about everyone would like to save some cash. Typical money-saving tips may get repetitive after a while, and many Americans find some financial advice annoying.

More than a quarter of Americans (26%) find “perform your own grooming/beauty services at home” to be one of the most annoying pieces of financial advice. Roughly 1 in 5 Americans (18%) say “make your daily coffee at home instead of buying it from cafes/restaurants” is among the most annoying pieces of advice, and 24% say the same of “cancel cable/satellite TV.”

These financial tips are parroted for a reason: They’re easy to implement for most people. And many Americans take these money-saving measures, even though they can be annoying.

 

More than 2 in 5 Americans (42%) say that they currently make their daily coffee at home instead of buying it at a restaurant or cafe, making the advice to skip the daily latte irrelevant for a large swath of people since they’re already doing it. The No. 1 piece of financial advice Americans follow is cooking more at home instead of eating out or ordering delivery (59%).

What you can do: Invest the savings

Spending less on something only helps move your retirement fund needle if you invest the savings. Here’s some potentially annoying advice: The earlier you invest, the better.

“Financial experts harp on the benefits of starting early because it’s so true — an early start gives your money more time to grow, and that allows you to save less but end up with more. It’s a win-win situation,” says O’Shea.

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from Oct. 1-3, 2019, among 2,013 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Marcelo Vilela via email at [email protected]

We calculated the cost of an expensive latte habit by assuming a $4 latte, five days a week, for 50 weeks of the year. That’s $1,000 in annual contributions, which we compounded annually at 6%, a common long-term return estimate for investments in the U.S. stock market. Using this method, we calculated total contributions of $21,000 and a total return of $18,993 over 20 years.

We calculated the return of $84,000 for those who purchased a house in their budget and invested the difference over 20 years by using NerdWallet’s “How much house can I afford?” calculator. For this example, we used an annual household income of $63,179, the national average as of 2018, according to the U.S. Census Bureau, no minimum monthly debt and excellent credit.

The estimated monthly payment for an affordable mortgage is $1,895. A stretch mortgage payment is estimated at $2,264. We took the difference between the two ($369 a month, or $4,428 a year) and compounded it annually at 6%. Using this method, we calculated total contributions of $92,988 and a total return of $84,100 over 20 years.

Methodology on all other analyses for the calculator is included in the calculator’s source notes.

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