Friday, April 18, 2008

Have You Calculated Your Number?

What is your number, that big round amount you need to accumulate in order to live comfortably in retirement?

I’m going to take a wild guess and say that figure is probably north of $25,000. But brace yourself. According to the 2007 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) released last week, 60% of current retirees have less than $25,000 in total savings and investments.

Personally, I can’t imagine how they manage it. Sure, some of them have pensions. Virtually all of them are receiving Social Security and Medicare benefits. But still… heading into your “golden years” with less than $25,000 must be terrifying.

Those of us still in the workforce could use a little shaking up too. The same survey shows that 36% of workers have less than $10,000 in retirement savings! Another 13% have less than $25,000. In other words, nearly half of all workers have less than $25,000 saved for retirement.

Some of these folks could benefit from reading Aesop’s tale about “The Ant and the Grasshopper.” There are clearly a lot of grasshoppers among us.
I think I know why. Surveys show that nearly half of all workers – I think we can assume which half - believe their retirement costs are the responsibility of their employers or the federal government.

Yet pension plans are going the way of the Dodo bird. They've been replaced by 401(k)s. And, for young workers, Social Security is a demographic time bomb.

When the Social Security program was created in 1935, a 65-year-old American had an average life expectancy of 12 ½ years. Today, it is 18 years… and rising. In addition, 78 million baby boomers began retiring this year. In 30 years, there will be twice as many Americans eligible for Social Security as there are today. Meanwhile, the number of workers per beneficiary has dropped from 5.1 in 1960, to 3.3 in 2007, to a projected 2.1 in 2032.

For political reasons alone, current retirees are safe. But we baby boomers can’t realistically expect future generations to pay the mountain of taxes required to support us into our 90s. It’s just a matter of time before the age of eligibility is raised, benefits are cut, or both.

However, if you’re working now you still have time to make the choices that will lead to a more comfortable retirement. As the American writer Elbert Hubbard said, “responsibility is the price of freedom.”

But the whole process starts with disciplined saving. You have to forego current spending to receive future benefits. Essentially, you need to save as much as you can, for as long as you can, beginning as soon as you can. (Millions of boomers are learning that this means working longer than they originally planned.)

If you must remodel the kitchen, own that new 50” plasma TV or take that trip to Disneyland, save for them separately. But question first of all whether you really need them.

When you take responsibility for your financial welfare, it’s empowering. You let go of the idea that it is someone else’s obligation to provide for you in retirement. It means making hard choices. But, trust me, no one at your company or in Washington cares as much about your financial future as you do.

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