I've had this nagging feeling about my retirement portfolio ever since I met with my accountant a few weeks ago. He reminded me that I didn't set aside enough money for my golden years during 2009. Fortunately, a new study from T. Rowe Price is making me feel a bit better. According to the investment management firm, even "late" savers can build up a healthy nest egg if they commit to making aggressive contributions for at least 10 years.
T. Rowe Price took a look at what I'd call a worst case scenario: a 55-year-old with no nest egg at all. If that person maxed out a 401(k) and received a 3% contribution from an employer, he could build a portfolio worth over $400,000 by the time he's 65. (This figure assumes an 8% annual return.)
Most of us would agree than a sum worth less than half a million dollars isn't enough to retire in style. But if you also downsize your home and buy a condo in a cheaper part of the country, you certainly wouldn't find yourself eating cat food.
Don't get me wrong, I'm not advocating that families in their 30s and 40s stop saving for retirement and wait to build up their nest eggs until they're in their 50s. I'm just comforted by the fact that my missed year (or two) of savings won't put me on the path toward poverty once I hit my 80s. I also have a funny feeling that other families reading this post may now feel better if they too found during this recession that unexpected expenses ate into the cash they would have normally put toward their later years.
Having said that, the T. Rowe Price study also serves as a cautionary tale. If a 55-year-old earning $80,000 a year put just 6% of his income toward retirement and received a 3% match from an employer, he would have a portfolio worth less than $150,000 by the time he's 65.
The message here seems pretty clear. You had better save aggressively if you want to get your nest egg back on track whether you got a late start or missed a few years of contributions. Save less than the maximum amount that the IRS allows and you'll likely find yourself in a cubicle farm rather than on a putting green come your 65th birthday.
Did you make a smaller retirement contribution than you'd like during the last year? How do you plan to catch up?
Private Putting Greens? image by Carly & Art, courtesy of CC 2.0.