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The Not So Golden Years

A new study says we're lousy at saving for retirement. Is that a problem?

I saw a cartoon the other day where a man was given one — and only one — wish by a magical genie. After deep contemplation, the man decided what his wish would be.

“Genie,” the man proclaimed with an arrogant grin, for he knew he had chosen wisely, “I want to have enough money to live on for the rest of my life!”

“Done!” the genie replied. “Your life will end in one week.”

For many twenty- and thirty-somethings, running out of money during retirement is not a laughing matter — it’s a real possibility.

A recent study by Fidelity found that the average 25-40 year-old American, earning at least $20,000 a year, is on track to replace only 55 percent of their projected pre-retirement income when they retire.

Can you imagine retiring on half of what you make now?

And that’s the average. Twenty-one percent of us haven’t even started saving for retirement yet.

Sounds like those golden years might not be so golden.

Of course, it’s easy to rationalize that “we have plenty of time” or “there’s just no way to squeeze any more money out of my paycheck.” But the experts agree that twenty- and thirtysomethings need to do some serious retirement planning — and we need to do it now.

Why the urgency?

“Because this isn’t your parents’ retirement,” writes Robert Brokamp, a contributor at The Motley Fool financial education site.

According to Brokamp, retirees have traditionally relied on a three-legged retirement stool: Social Security, pension and savings. Most Americans could count on all three, and that left them sitting pretty.

But us? Well, our three legs aren’t looking so great.

Take pensions.

In the “old days” you worked for one company your whole career and then, after you retired, they dutifully sent you a check every month — your pension.

More than likely, though, your company doesn’t even offer a pension. Only 20% of Americans have one, down from 40% in 1975. Add in the fact that very few of us plan to be “lifers” in our jobs (I’ve had four already), and our chances of a cushy pension (which is based on years of service) sink even lower.

So there goes one leg.

How about Social Security?

The politicians and activists continue to debate reform, personal accounts and exactly when (not if) the system will go bankrupt.

Important debates, to be sure, but it seems that younger workers have simply given up hope. According to a Quinnipiac University poll from March, 63% of thirty-somethings don’t believe they will see one cent of Social Security benefits when they retire.

And the experts aren’t exactly encouraging.

“For the younger crowd, don’t count on receiving all of the benefit estimated in [your Social Security] statement,” writes Brokamp.


So that leaves us in a unique position. Rather than having a three-legged retirement stool, it looks like we can only fully count on one — our personal savings.

Pressure anyone?

But there is some good news: We’ve got time on our side.

Brokamp gives the example of four different investors — A, B, C and D, who each invest $5,000 a year for 10 years and then stop.

But the investors are different in one crucial way — they all invest at different times in their lives. Investor A invests from age 25 until 35. B is from 35 to 45. C is from 45 to 55 and D is from 55 to 65.

At retirement, D has $83,227 and C has $168,887. But the real story is between A and B. Have you thought about putting off your retirement savings for a few years? Want to buy a house first, or save for the kids’ college ahead of your retirement and “catch up” later?

Here’s the wake-up call. Investor B has $364,615 at retirement. Not bad. But Investor A will be soaking up the Caribbean sun with $787,176.

Same rate of return. Same investment. Very different results. Just from starting earlier.

As Brokamp writes, “No matter your age, the sooner you start, the more money — and options — you’ll have.” Or, as Proverbs puts it, “the ants are not a strong people, yet they store up their food in the summer.”

It may seem daunting to try to squeeze one more dime out of your paycheck. But one dime now may make more than a dollar down the road.

My husband and I took this to heart before we had kids.

We knew my income would evaporate once we had children. So we threw everything we could into his 401(k) account. Including what his company matched, we socked away about 18% of his salary. We put my salary into Roth IRAs. has something to say about that, too.

It wasn’t that we became spending Nazis. But we knew that our “summer” — our time when we could really store up for later in our lives — was limited. We wanted to make the most of it.

Now that we’ve hit our thirties and I stay home with the kiddos, we’ve had to lower our contributions. But we know our initial investments are growing — along with those of Investor A.

Still, there’s a catch. Saving early is only half of the equation. Someone who invests a dollar a month for 40 years at 6% has used the benefit of time, but doesn’t even have two thousand bucks when he’s done. You have to save enough.

So exactly how much is enough? Was our 18% on target or overkill? Or, scarier, was it not enough?

One rule of thumb you’ll often hear is to save 10% of your income for retirement. But experts say that rule may be out of date.

Here’s why. That 10% rule was based, in part, on the old adage that retirees would need to replace 70 to 80 percent of their pre-retirement incomes. After all, retirees have paid off their mortgages and lowered their expenses. So they won’t need their full incomes, right?

Not right. Today, home prices and refinancing are at record rates, meaning mortgages won’t necessarily be paid off at retirement. In addition, expensive hobbies like travel or golf can push expenses up rather than down. Not to mention the fact that we’re living longer and will probably have higher health care costs than previous generations.

Randy Spiegelman, a vice president at the Schwab Center for Investment Research, told U.S. News and World Report that he advises saving enough to replace 100 percent of pre- retirement income.

This, in turn, ups that rule of thumb. The Schwab Center recommends twenty-somethings save 10 to 15 percent of their incomes. Those who wait until 30 to start saving need to save 15 to 25 percent.

If those percentages make you want to bury your head in the sand, take heart.

First, it may not be as hard as it seems. Many companies offer matching funds for 401(k)s and 403(b)s.

Robert Brokamp crunches that into real numbers. Let’s say you make $75,000 and put 10% away in your 401(k) — $7,500. First off you just saved about $1,800 in taxes because 401(k) contributions are tax deductible. Then, a typical company would match you $2,250 (the most common match is 50 cents on the dollar up to 6% of salary). So you’ve put away 13% of your income and saved yourself $1,800 in taxes. Nice.

Second, percentages may always be a little off. To really individualize your numbers, try an online retirement calculator. Here, you’ll have to estimate inflation (the standard is 3%), your investment rate of return (usually 6-8%) and what part-time income you think you might earn during retirement. This can feel a little like a guessing game, but once you enter the hard numbers of your salary and monthly contributions, it gives you a great picture of where you are relative to your goals.

Regardless of where you are, though, experts agree that our future retirement is in our hands. That can be unnerving, but also empowering.

We’ve got the time. We’ve just got to use it.

Copyright 2005 Heather Koerner. All rights reserved.

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About the Author

Heather Koerner

Heather Koerner is a stay-at-home mom and freelance writer from Owasso, Okla.

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