Retirement savings daunting, but doable

Your Money staff reporter

Flipping through a fund company's quarterly newsletter, my eyes came to a screeching halt when I read this savings tips for young investors: "Strive to save at least 10 percent to 15 percent of your income for retirement, with any additional savings earmarked for short-term goals such as a car, vacation or house."

The newsletter elaborated, saying you should "save at least 15 percent of your salary each year for retirement as soon as you start working" and stay at that level throughout your career to ensure a comfortable retirement.

You've got to be kidding me. Even though a young worker a) likely does not own a home; b) probably owns minimal furniture in his or her apartment; c) typically carries some $20,000 in student-loan debt; and d) may have some credit card debt, a full 15 percent of a starting salary should be dedicated to retirement?

Judith Ward, a financial planner with T. Rowe Price in Baltimore, which published the newsletter, was quick to understand my skepticism.

"It's a lofty number, for sure," she says. "But this generation is going to be so reliant on personal savings for retirement, and that's much different from previous generations."

You've probably heard all the bad news already, but here's a refresher: It's expected that starting in 2040 payroll taxes will fund only 74 percent of promised Social Security benefits. Pension plans are going the way of typewriters and 8-track players. And people are living longer during retirement.

With more and more Generation Y-ers entering the workforce, there's a sense of urgency to get the word out: You need to start saving for retirement right away.

-- The bright side

The good news is that it may soon become easier to start saving. Last month, President Bush signed the Pension Protection Act, which gives employers the green light to automatically enroll new hires in a 401(k) plan.

And for employees already enrolled, more companies are trying to make investing as effortless as possible: 27 percent offer to rebalance your allocation every year and 17 percent will automatically increase your contribution rate, according to a January report from Hewitt Associates, a human resources consulting firm.

Finally, don't forget to take into account that any company match your receive on 401(k) contributions counts toward the 15 percent savings target.

"Even if you can't sock away the rest all at once, that's OK," Ward said. "Just make it a goal to get there."

-- The not-so bright side

Still, no matter how the government or employers tweak 401(k) plans, it's up to you to save enough for retirement.

One way to come to grips with the idea is to start calculating estimates--albeit very rough estimates--for how much you'll need.

You can find retirement planning calculators on the Web and tools at any of the major investment companies.

Think about what percentage of your salary you'll want to live on in retirement.

In a 2006 survey by the Employee Benefit Research Institute, more than half of current retirees said they live off of 70 percent or more of their pre-retirement income--a figure that most financial planners say to expect.

To get there, T. Rowe Price calculates that someone with 40 years until retirement and a 60/40 stock-to-bond ratio would replace roughly 50 percent of his or her pre-retirement salary. That percentage, plus any benefits from Social Security and a part-time job, should be sufficient, Ward said.

Consider that young investors can afford to take on more risk, ramping up their stock holdings, typically eking out more returns in the long run, and you may be able to skip that part-time job.

But again, that all depends on making choices today.

"There is nothing fun about delaying gratification," said Bonnie Hughes, a financial planner in Kennesaw, Ga. "But the equations won't change, and if you ignore them, you do it at your own peril."

E-mail Carolyn Bigda at

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