'Road To Retirement' Starts In Your 20s
Thanks to shrinking pensions and a cost of living that never seems to stop rising, it takes more money than ever to retire comfortably.
So, The Early Show's money maven, Ray Martin, kicked off a three-part series Thursday called "Road to Retirement."
Each day, he will address a different generation of workers, telling how much they need to be saving, and how to do it. He'll address specific challenges facing each age group.
Unfortunately, says Martin, many young workers aren't as concerned about retirement as they should be, thinking they're too young to be putting money aside for it.
In fact, only 31 percent of young workers who are eligible to join a 401(k) plan do so.
That, says Martin, is a huge mistake. If anything, the 20s is the stage of life when it's best to start saving for retirement, because the money has so long to grow. A relatively small investment can yield big results down the road.
For instance: Say you are 25 and you earn $30,000 this year. You manage to save 10 percent, or $3,000, of that income. By the time you reach 65, that $3,000 will have grown to $160,000, figuring a 10 percent growth rate, the average long-term growth clip of the stock market. Thanks to inflation, $160,000 won't have the same spending power in 40 years it does today, but think about it: If you can earn that kind of money after saving for one year, what can you amass if you continue to save throughout your career? The key is to get started now.
There are three keys, Martin stresses:
SIGN UP FOR YOUR 401(k)
The most important thing to find out when you join is how much you must contribute in order to receive the maximum contribution from your employer. Most employers will require you to contribute at least 6 percent of your pre-tax pay to get a 3 percent employer-matching contribution. If you are not eligible to join a 401(k), your employer does not offer one, or you work for yourself, you can still be saving for retirement. Check into a self-employed 401(k) or an IRA.
CONTRIBUTE 10 PERCENT
Most experts say that if average workers are employed and saving for retirement for more than 30 years, and all they have is their 401(k) and Social Security, they'll will need to contribute 13 percent to 15 percent of your pay each year into your 401(k) to have a reasonable chance of having enough money to pay for your retirement. So, if your employer contributes 3 percent, and you contribute 10 percent, the total contribution would be 13 percent.
Most college grads aren't earning big bucks, and even if they are, they feel burdened by student loans and credit card debt. Many twenty-somethings would probably laugh out loud at the thought of saving 10 percent of their income.
How do you juggle retirement savings and loan repayment?
INVEST IN STOCKS
Believe it or not, younger employees today tend to invest more conservatively than their parents!
Martin recommends investing 90 percent of a 401(k) in stocks, 5 percent in cash and 5 percent in bonds.
If you look at the performance of the financial markets between 1956 through 2005, a 100 percent stock allocation generated an average annual return of 10.4 percent, but a 60 percent stock and 40 percent bond allocation generated a return of 9.1 percent. While this may not sound like a lot, over time this can make a huge difference in the amount of money a younger person could have at retirement, Martin says.
So, by the time workers reach age 30, how much should they have saved for retirement?
According to a number of experts and a recently released study by Fidelity Investments, assuming you are looking to retire at age 65 and earn an average income, by the time you are age 30, you should have accumulated 1 to 2 times your annual pay in retirement savings, Martin reports.
On Friday, Martin looks at people in their 30s and 40s.RETIREMENT: AN OVERVIEW
According to Martin, the face of retirement is changing:
If you figure you can just do your job, stay with your employer and that at retirement, your retirement income will all just come together, think again.
Many people who are now 65 have pension plans and Social Security, which provide lifetime income. These people have not seen the pension cuts and reduced Social Security that will affect those in the workforce today. And if they just sold their house to downsize, they have also benefited from the recent housing boom.
But half of the workers in the private sector today are not covered by any retirement savings plan; their retirement income will be provided only by Social Security and whatever they have managed to save on their own. The other half covered by a retirement plan provided by their employer are most likely to be covered by a 401(k) type of plan, in which the employee must join the plan and save enough in it to provide for his or her own retirement income.
The reality for workers today is that a 401(k) plan will be their only retirement plan. According to the Center for Retirement Research, the percentage of private sector workers covered by only a 401(k)-type plan grew from 43 percent in 1992 to over 61 percent in 2004.
And expect this trend to continue. The advantages for employers are that 401(k) plans provide lower and more predictable costs. Traditional pension plans cost up to 8 percent of payroll costs, while 401(k)-type plans only cost 1 percent to 3 percent, according to benefits experts. Also, because a 401(k) plan provides a lump sum at retirement rather than a lifetime benefit, the costs to the employer do not increase as life expectancies lengthen.
And for people who will be retiring in say 10, 15 or 20 years, the alarm bell is ringing. According to a recent study by the Employee Benefit Research Institute, the average 401(k) balance for 2005 was: $58,328 for all plan participants, $24,169 for workers in their 20s, $140,957 for workers in their 60s, and half of all participants have account balances of less than $19,398.
Unless many of these folks do something now, they won't have enough savings to live on during retirement.
Behaving Badly in 401(k)
But the move to 401(k) plans means more employees will now bear the risk and cost of funding their own retirement. So, are 401(k)s really helping to provide a secure retirement for workers?
According to the Center for Retirement Research at Boston College, by some measures, the answer is clearly no:
Retirement Will Cost More
As more employers abandon lifetime pension plans in favor of 401(k) plans, more workers will have to come to grips with the staggering amount they will need to save, and will have to use their 401(k) properly to have the amount of money they will need at retirement.
If you are working and you've got a 401(k) plan and Social Security — and that's all you will have for retirement income — most experts and studies say that the average worker earning the average income and retiring at age 65 will need to have saved a minimum of 10 times their annual pre-retirement pay in their 401(k) plan at retirement. So, say you are making $50,000 at age 65: You would need to have saved $500,000 in your 401(k) plan by then to have enough income during your retirement years. And remember, that's a minimum.
Why so much? Well, for starters, the next generation of retirees will live longer during retirement and will need more money to pay for it. Americans are living 50 percent longer than they were in the 1930s, when age 65 was the benchmark retirement age. Men entering retirement at age 65 will need retirement income for 17 years on average, and women will need retirement income for 20 years or more, on average.
Another factor is health care costs. Many future generations of retirees won't have any employer-paid health insurance coverage and thus will have to use their own savings to pay for this. According to a study by Fidelity Investments earlier this year, a retired male without employer-paid health insurance can expect to pay out $90,000 during retirement for health care coverage. The figure for retired women is $110,000, since they are expected to live at least three years longer on average. Adding it up, a retired couple with no employer-paid health insurance can expect to pay $200,000 for out-of-pocket costs of health insurance.
Finally, there is the silent thief called inflation. The cost of the things retirees spend their income on seems to get hit hardest, things such as travel, health care and housing costs. The rate of inflation has been about 3 percent to 4 percent, and there's no reason to assume that it will decrease. At the rate of 4 percent per year, today's costs of living would double in just 18 years. So if you are beginning retirement today, and need $50,000 to live on now, in the year 2024, you will need $100,000 just to maintain the same purchasing power that your income provides today.
Clearly, the strategy for more and more U.S. companies and employers is to provide 401(k) plans as the primary and only retirement benefit plan for their employees. For now, the employees with these plans will have the full responsibility for saving and investing wisely for retirement. How well you handle this "do-it-yourself" retirement saving system and avoid the common pitfalls will mean the difference to having a secure retirement or an insecure one.