Who’s Afraid of Retirement Planning? (I am!)
Penelope Wang, you’re breaking my heart. Ms. Wang is a senior writer over at Money Magazine, and in the March 2007 issue her article “Retirement: Not So Far Out Anymore” really startled me.
It’s not like I’m clueless. Around the first quarter of every year, after I check my credit records and file for taxes, I look into my 401(k) and see what it’s been up to for the past year.
Usually some investments have grown more than others, and I rebalance like I’m supposed to, resetting the different buckets to the percentages I originally wanted. It can be frustrating selling those investments that have grown the most, because why do you want to dump a good thing? But I dwell on the investor’s maxim “sell high, buy low” and all that, and I do what I ought. So, I thought I was a pretty good boy with all this.
Then I read Ms. Wang’s analysis. Apparently by age 45, we’re supposed to have 4.1 times our annual salary saved up for retirement. This is so that, by retirement age, we will be able to provide for ourselves about 80% of our current incomes to live on. And this 4.1 figure assumes “full Social Security” which as we all know is a big question mark in 20 or 30 years.
For a 50 year old, you are supposed to have 6.1 times your annual salary saved up, and a 55 year old is supposed to have 8.5 times your annual salary. Good lord.
Ok, no need to panic, I’m not even 40 yet. But I barely have ONE x my salary in my 401(k) how the heck am I going to get FOUR x my salary in the space of 7 or 8 years?
And I’ll tell you what’s worse. The last few years, and again this year, I will max out what I am allowed to save in my 401(k). Apparently that’s not good enough. So I’m going to have to get more diligent, maybe finally open an IRA, or look into other tax-advantaged ways to save, like tax-free bonds.
On reflection, I know why I am so behind the target Ms. Wang has set. I didn’t leave graduate school and get a “real” job until I was 31, and that was only in the year 2000. My retirement savings at that point was 3% of my salary, and my salary wan’t all that much. So while I’ve been “good” the last few years, in fact it’s not savings that is going to provide a secure retirement, it’s investment growth. And that takes many, many years.
For those of you reading this in your 20’s, now is the time to start! Your retirement investments can grow for at least 40 years, multiplying in value 20 or 30 times. For those of us in our 30’s, 40’s, and 50’s, it is really time to catch up and get on the bus.
Anyone out there reading this who is close to retirement, or already retired? Can you share with us your tips, lessons learned, and a little dose of reality? We could really use your wisdom.
By 4x your salary, does she mean 4x what you live on? If someone only lives on 80% of their salary but is putting the rest towards retirement, wouldn’t they only need 4×80%, or 3.2 x their salary? I wonder if the 4.1 approximation already takes that reasoning into account.
Well Rich I am nowhere near 4.1 times my salary either. Add to that the thought of being fully self-employed long before I’m in my mid-40’s and well…..
But the biggest tip I DO have is to start saving early, often, and keep at it. In my early 20’s I worked on an assignment with an accountant who sat me down & extolled the virtues of saving into my 401K. I was like – huh? why? And her point was at the bare minimum contribute what the company matches so you don’t throw out free money. And, I’ve followed that approach since for the last 15 years. While I’m not amassing riches, it has allowed me to maximize my situation and capitalized on matches, and lay in wait for compounding to do its thing.