Keep salting it away
The longer you wait, the more you need for nest eggs
By Robert Powell, CBS MarketWatch.com
Last Update: 12:28 PM ET March 31, 2004
BOSTON (CBS.MW) -- Americans need to be salting away a lot more for their retirement. In fact, a whole lot more than you think.
Here's one estimate: Older Americans need to save 35 percent of income to create the ideal nest egg.
So why are Americans not saving and preparing for their financial future, and what will it take to get Americans to set aside money for their golden years?
We will learn the answers to those questions next Monday when the American Savings Education Council and the Employee Benefit Research Institute (EBRI) release the results of their much-awaited 14th annual Retirement Confidence Survey.
In years past, that survey has been a downer; it holds up a mirror to America at large and reveals that few are saving enough for retirement and few are confident they will enjoy a standard of living anything close to that which they have in their pre-retirement days.
What we can answer today, however, is how much Americans should be saving.
Aggressive saving, savvy investing
Rande Spiegelman, vice president of financial planning for Schwab's Center for Investment Research, has just crunched the numbers every which way for 20-somethings, 30-somethings, and 40-and-older somethings.
The bottom line is this: Americans should be striving to create a portfolio that is roughly 25 times the amount they plan to spend in their first year of retirement, minus what they expect from other sources of income such as Social Security. For someone who wants $48,000 of income during retirement, a $1.2 million portfolio should fit the bill. Or at least that's what they'll need if they want to withdraw 4 percent per year adjusted for inflation over 30 years of retirement.
Building a nest egg that size will require some aggressive savings and some savvy investing.
For the savings, Spiegelman says 20-somethings will need to set aside 10 to 15 percent of their pre-tax salary to reach their goals; 30-somethings, 15 to 25 percent; early 40-somethings, 25 to 35 percent; and 45-and-older-somethings, a mind-boggling 35 percent.
Ouch, you say. Well, that's nothing compared to the pain you'll have when you get into retirement and find that you haven't saved or invested wisely enough.
Now for the investing side. In crunching his numbers, Spiegelman put 90 percent of the portfolio in stocks and 10 percent in bonds for pre-retirees, and 60 percent in stocks and 40 percent in bonds for retirees. That's the same sort of mix he recommends for real-world investors.
Spiegelman's also used other assumptions that may (or may not) apply to real world investors. He's assumed a person is starting from scratch; that is, they have not yet begun to save for retirement. Of course, the Retirement Confidence Survey will likely show us that most Americans have not started saving in earnest for retirement, or if they have started, the amount saved is only a fraction of the amount needed.
Spiegelman also assumed a person will spend 70 percent to 80 percent of their pre-retirement, pretax income, adjusted for inflation, in retirement, that a person will receive $20,000 per year (in today's dollars) from Social Security or other sources of income, that a person's pre-retirement income will keep pace with inflation (estimated to be 2.5 percent), and that a person's portfolio will grow at 8 percent per year.
He also assumed -- using what's called a Monte Carlo simulation -- a 90 percent probability that the portfolio would last over 30 years of retirement. By the way, the Monte Carlo simulation tries to mimic real world stock and bond returns as opposed to using average annual returns. "We plan on market realities, not averages," he says.
And the reality is this. Most Americans don't think about planning for retirement until their late 40s. And that means Spiegelman's guidelines for 40-somethings paints an especially dreary picture. "It's a paradox," says Spiegelman. "By the time you get serious, it gets tougher."
Part of the problem, says Spiegelman, is that America is a nation of spenders. We tend to max out our credit cards not our 401(k) plans. Indeed, surveys show Americans contribute on average just 6 percent of pre-tax salary into their 401(k) plan. And the 2002 EBRI/ICI Participant-Directed Retirement Plan Data Collection Project shows that 40-somethings had on average just $61,033 in their 401(k) plan. "We are used to living at or beyond our means," says Spiegelman.
For the 40-plus-somethings who have saved very little or nothing at all, Spiegelman says there are options. But most center on saving more, spending less, working longer or not retiring at all. "No one wants to hear a lecture about spending less and saving more," says Spiegelman. "But procrastination is bad news."
Retirement rescue plans
So what can the 45-and-older crowd do now to boost their retirement nest egg? Here's Spiegelman's take:
> Max out your 401(k) or other employer retirement plans, and take advantage of any matching contributions. If you are 50 or older, take advantage of any additional "catch-up" provisions available to you.
> Open a Roth IRA for extra retirement savings. If you're not eligible for a Roth IRA, open a traditional IRA even if it's not tax-deductible. Again, there are catch-up provisions for the 50-plus folks.
> If self-employed, consider a SEP-IRA or qualified retirement plan/Keogh plan. Or consider a defined benefit qualified retirement plan. Those plans might allow you to contribute even more, based on actuarial assumptions.
> Once you've maxed out all available tax-deferred retirement accounts, save extra money in taxable accounts. A low-cost, no-load variable annuity might make sense if you are in a high tax bracket.
> Spend less in retirement. The saving target assumes that you will retire on 70 percent of pre-retirement, pre-tax income. Perhaps you can get by on less.
> Postpone retirement by a few years. By retiring later, you can build a bigger retirement portfolio and shorten the amount of time you'll need income. Plus, you can increase your potential Social Security benefit by waiting past your normal retirement age before receiving payments. The limit is age 70.
> Settle for a lower probability that your portfolio will last. The Schwab model assumes a 90 percent confidence level. You might be willing to accept a lower level of confidence that you'll be able to maintain your a standard of living throughout your retirement years
> Semi-retire and supplement your retirement income by working part-time.
> For many 40-somethings, saving and investing for retirement is a bit of a balancing act. It requires juggling savings rates, asset allocations, retirement income needs, expected rates of return, and inflation rates. But more than anything it requires discipline and the knowledge that saving something, no matter how little, is better than nothing.
"People have to deal with the here and now," says Spiegelman. "It's a question of whether someone wants to sacrifice their current lifestyle for the promise of a secure future."
Robert Powell is editor of CBS MarketWatch's Retirement Weekly newsletter. Powell is also co-author of "Decoding Wall Street" and executive producer of PBS' More Than Money. |
