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Americans Need to
Save More for Retirement
By Eileen Alt Powell
July 5, 2007
It has long been taken
for granted that if you save 10 percent of your income through your
working life, you’ll have plenty of money for a comfortable retirement.
Now experts are beginning to suggest more is needed because inflation
continues to nibble away at spending power, health care costs have
soared and today’s workers are living much longer than their ancestors.
The need to save more is not a message most Americans want to hear —
especially since the nation’s savings rate has been negative since the
second quarter of 2005, meaning that people are spending more than they
earn and either digging into their savings or building up their debt.
The most recent government data shows the savings rate at a negative 1.4
percent of personal income in May.
The 10 percent savings goal may still work for a very small group —
those who start putting money aside for retirement in their early 20s
never waiver, said Dallas L. Salisbury, chief executive officer of the
nonprofit Employee Benefit Research Institute in Washington, D.C.
“If somebody starts
when they get their first job and they save give or take 10 percent for
45 years ... then, by most any model, they will have accumulated enough
money so they won’t run out of money before they run out of life,” he
said.
But the reality, Salisbury says, is that most people don’t make saving
for retirement a priority when they’re that young. Nor are they that
diligent.
“The mantra has always been about starting to save early,” Salisbury
said. “People don’t naturally flip that and say, ’Wait a minute. If that
happens, doesn’t it mean that if I start late, I have to do a whole lot
more to catch up.”’ The reason is that someone who starts saving later
doesn’t get full advantage of the compounding of interest over time.
So someone who starts saving at 40 probably needs to set aside more than
20 percent of income, while someone who starts saving at 50 may be
looking at 35 percent of more, he estimated.
Those figures may seem outrageously high, but Salisbury points out that
many people can expect to spend 20 or more years in retirement.
Retirement calculators at the EBRI-sponsored site www.choosetosave.org
help families evaluate their individual situations.
Bruce D. Harrington, vice president for product development with MFS
Investment Management of Boston, said another way a worker can try to
determine how much to save is by projecting how much he or she will
likely spend in retirement.
There are two schools of thought on projecting these so-called
replacement ratios, he said. One suggests people are likely to spend in
retirement the equivalent of about 70 percent to 80 percent of the
income they earn in their final five working years. The calculations
take into account not only Social Security checks and pensions but also
401(k) retirement plan payouts and personal savings.
The other suggests people may need 100 percent or more — a goal
Harrington believes is more advisable.
“Life expectancies continue to rise, so it’s no joke that the average
person could live 20 or 30 years in retirement or more,” Harrington
said.
He adds that today’s retirement is different from yesterday’s because “a
lot of people are going to travel in retirement, buy that vacation home,
do things they hadn’t been able to do before.”
Harrington suggested workers should set up an age-appropriate savings
plan.
Workers in their 20s or 30s, for example, might consider opening an
Individual Retirement Account. Workers can put up to $4,000 a year of
pretax money into these accounts, and their savings grow tax-deferred
until they’re withdrawn in retirement.
Those whose employers sponsor defined contribution retirement plans,
like 401(k) or 403(b) accounts, can start by putting in 3 percent to 4
percent of their salary and stepping up the savings pace every six
months or 12 months, he said.
Workers in their 40s need to take a hard look at projected retirement
spending needs using retirement calculators such as those at MFS
Investment Management’s site, www.mfs.com, or the sites of other fund
and investment companies.
“You’re better off at 40 figuring it out and developing a plan than
waiting until it’s too late to catch up,” he said.
People who are 50 and 55 and haven’t saved “have the biggest challenge
because they have a lot less time to make up the shortfall,” Harrington
said.
Aside from saving extremely aggressively, this group has to make some
lifestyle changes that may include working longer, downsizing their home
and living extremely frugally in retirement, he said.
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