I can’t stop thinking about a recent Washington Post article on saving for retirement.
Two thoughts in particular stopped me cold — first, the situation most workers are in today:
In the wake of the recession, the Employment Benefit and Research Institute found that, among other things, fewer workers are saving for retirement, a quarter of those surveyed have nearly no savings (i.e., less than $1,000), most workers don’t know how much they’ll need to retire and more than half say their total savings is less than $25,000.
Next, the cold hard facts of how far that puts them from where they need to be:
… without a pension, how much do you need to get $50,000 (before inflation) each year? Simply put: a bundle. If you plan to retire at 65 and hope to have at least 30 years in retirement, you’ll probably need something like $1.5 million in today’s dollars. Even a little inflation could push that to $3 million if you’re two or three decades from retirement. For the moment, let’s leave inflation out of the calculation.
In other words, if you have saved just $25,000 — and remember, that describes about half of all workers — you are less than 2 percent of the way toward your goal.
If the writer’s goal was to get my attention, it worked. Read the full article here.
I’m a little smug about retirement savings. My mom nagged me into starting a 401(k) when I was only a year out of college and convinced me that the best way to start saving is to boost the contribution every time you get a raise — it’s money you aren’t used to having so you won’t miss it.
But it gives me pause to think how far we have to go to hit $1.5 million, much less $3 million in savings.
And what about our peers who have nothing set away? Or who might have been doing reasonably well until the stock market wiped them out?
Since I love Excel, I played with some scenarios. I varied the expected age of retirement, the amount already saved and the end savings goal to see what happens to the annual target.
(Expand your browser window to see all four situations)
| Age today | 30 | 40 | 45 | 50 |
| Age when you hope to retire | 65 | 70 | 65 | 70 |
| Years until retirement | 35 | 30 | 20 | 20 |
| Amount you have saved | $50,000 | $500,000 | $100,000 | $1,000,000 |
| Amount you would like to have at retirement | $1,500,000 | $1,500,000 | $1,500,000 | $2,000,000 |
| Amount you still need to save | $1,450,000 | $1,000,000 | $1,400,000 | $1,000,000 |
| Amount to save per year | $41,428.57 | $33,333.33 | $70,000.00 | $50,000.00 |
These numbers are crude, of course. They don’t take into account the effects of compound interest, for example — but they also don’t allow for losing your shirt in a stock market plunge.
Nor do they include saving to send the kids to college. These are just the numbers for your retirement. College tuition, a vacation home or anything else you’re saving for would be in addition.
My takeaway: under almost every circumstance, we need to step up our savings or we’re headed for a serious national crisis. Either we’ll have a generation unwilling to retire to make way for new workers or we’ll have people teetering on the brink of bankruptcy when the paychecks stop.
Or maybe the answer is what the Health and Retirement Study suggested — that we shouldn’t stop working.
How are you doing saving for retirement? Do you have any tips for making your future finances a priority?
7 Comments
Lara Zielin
Here’s another wrench to throw into everything. Back in college and the early years of my employment, everyone was telling me what an awesome investment a 401k would be and how much it would grow, blah, blah, blah. For many of us who actually *believed* that and invested, we’ve lost a TON of cash in the last couple years. Overall, many of us have only seen a loss in our retirement accounts, not a gain. Which begs the question: if we do save, are we better to just put the money under our mattresses? Seriously. Plus all the fuss with taxes and inaccessibility … I don’t get it. What’s the good? Savings, yes. I hear ya. But 401k? I’m STILL waiting to be sold. (Full disclosure: my employer contributes to my 401k on top of my money, so I’m not going to void my account any time soon. I just think it’s kind of a racket.)
Rove
Two really important things Lara, maybe three.
1. Your 403(b) (because you work for a big, generous university) comes out of your paycheck BEFORE taxes, making it a real 1.00 dollar, not the post-tax 75 cents you just put under your mattress.
2. Your employer puts in $2 match for every $1 of yours. Ain’t nobody gonna match your mattress funds (or any other form of retirement, for that matter).
3. Dollar Cost Averaging — A dorky phrase that should be your mantra in times like these. What you’re buying in your 403(b) is actually shares in big pooled investment. When the market sucks, those share prices go down, making the dollar figure on your quarterly statement a little depressing. BUT with each month’s purchase, a lower share price gets you get MORE shares for the same amount of money. Over time, as your share price rises again, you’ll have more shares (and more dollars) than you would have if the markets never tanked. The key thing is to just keep plugging away at the donations, and not to fixate too much on the dollar amount of the quarterly statement. Your number of shares has grown, big-time, and you’ll reap the benefits when the sun comes out again. In fact, I’d argue that those of you got into 403(b) relatively recently will come out ahead of your elders because you bought cheaper shares.
Finally, a rant: I don’t know who ever told you young pukes that markets and housing prices would just go up forever lahdeedah and prices would never-ever drop, and nobody would ever get hurt. It happens. Just be glad you weren’t 65 or about to cash in a kid’s college fund when this shit hit the fan. John’s right too — diversify. If you’re in all stocks, you got creamed that much harder, so now you know.
Lara Zielin
Rove, while it’s true that my employer is matching my (real dollar) contributions and I may be buying more shares with said monies, I still think the mattress dilemma stands. Because there is no guarantee — NONE — that when I turn 65, these monies will be available to me. And by available I mean *there* — that another crash hasn’t swept them all away. You said it yourself: I’m lucky that I wasn’t 65 last year. Well, hopefully I’ll BE 65 someday. And I’m not entirely convinced that when I am, the market will have done right by me. And all the diversity in the world won’t change that.
Also, the people who said homes were a great investment weren’t just talking to “young pukes.” Lots of people said that. Just like lots of people are saying, “Oh, totally, now you should be investing in stocks more than ever because of this magic thing called dollar cost averaging.” Sounds like the same rhetoric to me.
John
I hear you, Lara. It’s a drag to see the funds go down down down. I have a some of it in bonds and cash, so that helps.
I’m currently maxing out my Roth IRA every year, much of it in cash accounts. That amount is nowhere close to what I ought to be saving according to Colleen’s numbers, but on the brighter side, it hasn’t gone down much the past few years.
rove
Lara – Please pardon my rhetorical flourish.
The point is nothing is guaranteed. You put your finger right on the problem. (Social security was supposed to be guaranteed, but it was left in Congress’ grubby hands. I expect the baby boom will have burned through it all by the time I can collect.)
All you have for protection is strategy and awareness. Your employee-matched, pre-tax savings plan is the best strategy available at this point. I think it will beat the mattress, but no, it’s not a guarantee.
As it turns out, ‘all the diversity in the world’ DOES matter. People who were already retired who had followed the advice to make their retirement funds more conservative came out relatively well (couldn’t find the NYT story of a week or so ago that said this.) It’s the people who were one year away from battening the hatches who got clobbered, but the smart ones were gradually making their funds more conservative as they neared the exit. (and they were old enough to remember 1980, 1973 and so on, so they should have known it could happen.)
It’s impressive that you’re this upset about retirement already, but if you’ve got, what 25 years left? dollar-cost average them stock funds and don’t look at the statements until the economy turns around. Take advantage of the free retirement consulting offered through your workplace program. They’ll show you what it’ll take to reach that all-Ramen-diet level of retirement savings that I am so looking forward to.
Sign me, Career halfway; Retirement one-tenth.
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