Terrie Monaghan would retire tomorrow if she could.
Monaghan, 45, is tired of the stress of her job as a coordinator for the state's Office of Emergency Services. Her lack of retirement savings, however, means that she is destined for many more years spent untangling bureaucratic snarls, punctuated by the nightmarish aftermaths of earthquakes, floods and other disasters. Switching jobs could mean putting off retirement even longer, since she would probably lose her state pension.
Dealing with emergencies "is an adrenaline rush, but you can only crawl under tables and stay up all night for so long," the Pasadena resident said. "I want to do something else."
From mid-career on, American workers learn that it can be more than just mortgage payments, lack of opportunities or ennui that might trap them in their jobs. Not having the financial freedom to retire often dooms them to punching a time clock long beyond the time when they would rather be fishing, launching a second career or traveling the world.
A fat retirement account, on the other hand, can give workers the flexibility to retire earlier, try a new job or simply worry less about losing their current positions.
"Whenever I talk to a young person, I encourage them to save as much as they can in the early years to give themselves freedom," said Anne Fink, a certified financial planner who works as a benefits and planning consultant for UC Irvine. "When they get to age 55 they may want to bail, but if they haven't saved they can't do it."
The retirement trap is most obvious when it affects older workers. Jerry Olsen, 70, is an Irvine engineer who started saving for retirement 10 years ago. He figures he needs five more years of saving--and strong stock market returns--before it makes financial sense for him to quit.
But younger workers can feel the pinch too. Those who job-hopped through their 20s and 30s may find they are decades away from qualifying for the company pension--presuming their company even offers one.
Job-hopping can even hurt people who save in 401(k)s, a retirement account that often can be rolled over from job to job. The culprit: 401(k) waiting periods, which prevent workers from contributing to the plans for up to a year.
Rosemead software developer Tim Chau, 29, figures he lost tens of thousands of potential retirement dollars at his last job, which required him to wait a year before contributing to the 401(k). His current job--his fifth in five years--required him to wait three months.
"At my next job, I'm going to demand no waiting period," Chau said.
Workers who in their youths ignored the self-funding options--401(k)s, 403(b)s and individual retirement accounts--may have to frantically shovel money into their savings during their 50s and 60s to try to make up the gap.
And the gap can be huge. A 25-year-old could put aside $2,000 a year starting today and, assuming an 8% average annual return, wind up with a nest egg of more than $500,000 at age 65. A 45-year-old starting today would have to invest more than $11,000 a year to obtain the same result, and a 55-year-old would be forced to find nearly $36,000 a year.
The total workers need in order to fund retirement is also growing, financial experts say. Americans are living longer and staying healthier, which means they will need bigger nest eggs to last them through longer and more active retirements.
Traditionally, financial planners have assumed the average worker would need 60% to 80% of his or her pre-retirement income. Today, some financial planners say their clients will need 100% or more of their working incomes in the years immediately after they retire. Although work-related expenses will drop, these clients will want to travel and indulge in other expensive hobbies that can quickly consume an inadequate retirement fund.
Meanwhile, traditional retirement options appear to be dwindling. The number of workers covered by company pensions--40 million--remains static, even as self-funding options such as 401(k)s are growing. Social Security is rumbling toward bankruptcy, leading many to presume that only meager benefits will be available when they retire.
Even those with good pensions can find themselves in a peculiar pickle. Teachers and government workers like Monaghan, for example, have plans that replace 60% or more of their incomes after they put in 30 years. But lacking other retirement savings, they can feel chained to those jobs.
Monaghan, for example, could theoretically retire at age 50, but she would get only 27% of her salary in pension benefits if she did so. Staying just five more years could bump the percentage to 40%; if she retires at age 60, she could get more than 65%. Furthermore, the longer she stays, the higher her final salary, which is used to determine her monthly pension amount. Even if her salary rises just 3% a year, her pension benefit at 60 would equal more than she is making now.
If she left state employment, her retirement would probably be far less secure. The private sector technology jobs Monaghan dreams about rarely offer pensions, so she could find herself working well into her 60s or even 70s before amassing enough to retire.
Monaghan knows she will be better off than seniors who are forced to flip hamburgers to supplement Social Security. But she wishes she had planned for her retirement years earlier.
"I would have stayed longer in school and I probably wouldn't have gone into public service," Monaghan said. "I would have saved more."
People facing the retirement trap can use some of the following exit strategies to reduce the chances of having to work too far into their golden years:
* Get a realistic estimate of what you have and what you need.
Your human resources office can explain what retirement benefits your company offers and what you are entitled to at various retirement ages. You can request an estimate of your Social Security benefits by calling (800) 772-1213 or visiting http://www.ssa.gov. Retirement calculators available on the Internet or through mutual fund companies can give you a rough idea of what you might need. T. Rowe Price at (800) 541-8803 or http://www.troweprice.com offers paper, software and Web-based versions of its better-than-average calculator.
Be realistic about your probable income needs in retirement. If you're a homebody with a frugal lifestyle, or if your mortgage will be paid off, you may need a lower percentage of your current income than someone who likes to travel or faces big mortgage payments well into retirement.
* Use all your retirement options.
Even if your company or government agency offers a pension, take advantage of any other tax-deferred retirement savings accounts offered. These might include 401(k), 403(b) and 457 deferred-compensation plans. Starting late in your working life is better than not starting at all.
401(k) and 403(b) plans are "portable"--you can take the proceeds from one job to the next, unlike most pensions. After retirement, your money can continue to grow tax-deferred, which means your retirement dollars will go further.
* Save on your own.
Any worker who makes at least $2,000 a year can contribute that much to an IRA. People with self-employment income can set up Simplified Employee Pensions or Keogh plans to boost their retirement savings.
* Tap your equity.
Holding on to the family manse might be important for sentimental reasons. But if you're facing a cash-strapped retirement, consider selling your home and either renting or buying something less expensive. Many retirees take this a step further and move to an area with a lower cost of living. An income that allows you to scrape by in urban Southern California could provide a comfortable retirement in Baja, rural Washington or the Arizona desert.
* Moderate your risk.
Some late starters make the mistake of gambling their retirement savings on speculative stocks, hoping one or two big scores will make up for lost time. They're more likely to suffer debilitating losses that push back their retirement dates even further.
Retirement investors should diversify their assets and include cash and bonds, or bond funds, along with stocks and stock funds to cushion the potential blows of a volatile stock market.
* Ease out.
Making the transition to part-time work or taking a consulting job after retirement can help your retirement fund last longer.