Gilding the Golden Years : Save Early, Often and Wisely or Risk Retiring in Poverty
Millions of Americans are worried that they’ll outlast their retirement savings and be forced to live their final years in poverty, many recent surveys show.
If current saving and investing patterns continue, such fears may well be justified.
But thanks to new rule changes for 401(k) savings plans that go into effect in January, corporate America and the federal government are beginning to act. They’re not jumping out of the boat to save you, but they do aim to throw out a life preserver to help you save yourself.
How close are you to drowning? Here are the facts.
Roughly eight out of 10 Americans--some 76 million households--will have less than half the income they need to retire comfortably, according to a study by Arthur D. Little and WEFA Group.
Women have more reason to be worried than men, says a spokesman for Merrill Lynch, which just completed its fifth annual retirement planning study. Women generally save less and start saving later than men, the study says. Because women also live longer than men on average, they’re about twice as likely to die poor.
At the root of this bleak picture are several factors.
People underestimate how long they’ll live and overestimate how much their company and the government will contribute to their retirement. People also start saving too late, don’t save enough and then invest retirement savings poorly, experts say.
“The problem is that retirement is not a concrete thing,” says Kathryn Hopkins, executive vice president of Fidelity Investments in Boston. “It is hard to figure out today what you should do to provide for a financial obligation that’s sometimes 20 or 30 years away.”
Additionally, people save based on how long they think they’ll live--and their projections are way off, says a researcher at the Employee Benefit Research Institute in Washington. For example, roughly one out of six individuals who expected to retire early--between the ages of 55 and 64--thought they’d have between one and 10 years of retirement. In fact, their average retirements range between 17.9 years and 24.7 years, EBRI says.
Meanwhile, more than half of all self-directed retirement plan money is invested in certificates of deposit, bonds, insurance contracts and other “guaranteed interest” vehicles--the most conservative investment options--compared to less than 25% invested in the stock market. Over the long haul, stock investments do much better than guaranteed-interest options. So conservative investors will either have to save more or live on less at retirement.
“A return of 3% or 4% compounded doesn’t give you anywhere near the amount of money that 8% return does,” says Boyd Griffin, president of Retirement Advisors in New York. “Even 1 percentage point makes a big difference when you’re talking about compounded returns over a period of 30 or 40 years.”
Indeed, if you contribute $100 monthly for 40 years and earn a 6% return, you’ll have $200,145 when you retire. If you earn 10% annually instead, your nest egg balloons to $637,678, according to Merrill Lynch.
But possibly the worst problem facing retirees is starting their saving too late in the game, Griffin says. The average American starts saving for retirement at age 38, he notes. If they’d started a decade earlier, they could stop by age 38 and still come out ahead. Why? Compound interest.
If you save $4,000 a year for 10 years--a total of $40,000--and earn 10%, you have $72,219 when you’re through. But if you instead contribute $1,000 a year for 40 years--also a total of $40,000--you’ll have $562,986.
The good news is that companies and the federal government are trying to help.
At the heart of the federal government’s effort are rule changes that affect the ubiquitous 401(k) plans. A 401(k) is a company-sponsored retirement account that allows workers to contribute pretax dollars and earn tax-deferred returns until their money is pulled out of the plan. Many companies also match part of workers’ contributions.
Companies have embraced 401(k) plans like few other employee benefits--roughly 80% of large firms offer them--partly because the plans get companies off the hook. Other types of pension plans require companies to pay workers set benefits at retirement. These don’t. The benefits you get are a direct result of how much you put in and how well you invest the money. Companies are not fiduciaries nor guarantors.
But government rules that go into effect this January say that some companies may be considered fiduciaries if workers aren’t given enough investment choices. How much is enough isn’t spelled out. But firms that have historically offered few options are scrambling to increase choices and information about their plans, industry experts say.
One sign of the effort is a host of newsletters that have sprung up in the last few years that help companies talk to their workers about investments. The most recent 401(k) Dimensions, was launched by Hearst Corp. last month. Money magazine and Standard & Poor’s have also established newsletters.
In the two years since its launch, S&P;’s Your Financial Future--sold to companies and distributed to workers--has attracted more than 500,000 readers, says Publisher Thomas Nugent.
Companies are turning to the newsletters now partly because of the new government rules, but also because they’re fearful of what might happen when their workers discover themselves hundreds of thousands of dollars short at retirement.
“Companies are concerned that years from now their workers are going to come back to them with lawsuits that say, ‘Hey, you made me into a financial planner responsible for my own investments, but you didn’t give me the tools to do it properly,’ ” Nugent says. “They’re off the financial hook, but they may have gotten on a legal hook.”
Whatever the reason, there’s a sincere effort being made to provide workers with good and accurate information about the importance of saving and about retirement savings options. Workers who take advantage of the opportunity may find themselves sitting pretty in their golden years--rather than cast adrift.
Can You Afford Not to Save?
Inflation is the wild card in any retirement plan. Before you determine how much you need to save, you’ve got to figure out what living is going to cost you 20, 30 or even 40 years from now. While it’s impossible to accurately project the cost of every product, Merrill Lynch picked five items and projected their value based on a 4% average annual inflation rate. The results might get you saving.
New car in 40 years: $82,000 Pair of blue jeans in 40 years: $168 New home in 40 years: $1,152,000 Caribbean cruise for two in 40 years: $6,700 Two movie tickets in 40 years: $67
Source: Merrill Lynch
