After Years of Hard Work, Don't End up Scraping by Post-Retirement

This week, Gail shares a golden-years rule to remember: the quality of life you will enjoy in retirement is in your hands.

Dear Friends-

Try this pop quiz regarding the traditional "3-legged stool" of retirement income:

For future retirees (are you listening, fellow Boomers?), the single biggest factor that will determine what kind of retirement you'll enjoy will be:

A) Social Security
B) Company pension
C) What you have saved yourself

The answer should be obvious. With the fiscal health of Social Security in question and old-fashioned pensions going the way of the 8-track cassette, clearly the lifestyle you'll be able to afford in the future depends upon being disciplined about what you do with your money today.

A new report by the Employee Benefit Research Institute (EBRI), a non-partisan Washington, D.C. think tank, contains both encouraging and disappointing news.

As of the end of 2005, the most recent data compiled, the amount of money in IRAs hit a new high: $3.67 trillion. The amount in IRAs exceeds the total assets in either pension plans or "defined contribution" plans (401(k), 403(b), profit-sharing, etc.) by more than a trillion dollars. According to EBRI, "IRAs appear likely to be the largest non-Social Security asset in retirement for many in the next generation of retirees (baby boomers and beyond)."

Craig Copeland, the senior research associate who conducted the EBRI analysis, says the increase in IRA assets is due to two factors: 1) rollovers from employer-sponsored retirement plans, and 2) market returns.

In other words, when we change jobs, we're getting smarter about rolling the money in our 401(k)s to IRAs. A rollover allows you to continue to postpone income tax on this money until you withdraw it. The tax-sheltered growth an IRA offers also enables your money to grow faster than it would if it were in an account that had an identical return, but was taxed each year.

The second thing I'd like to point out is that, as the saying goes, "you've got to be in it to win it." Those who remain invested reap the benefits when the financial markets head higher.

It's impossible to guess when this will happen. Trust me. Even the so-called brightest minds on Wall Street can't predict what kind of a year stocks or bonds will have; there are just too many variables. For instance, who foresaw the devastating hurricane season we'd have in 2005 and the impact this would have on energy prices? Answer: the same individuals who predicted there would be zero storms of similar magnitude in 2006 — no one! And the weather is just one of many, many unknowns.

Unlike the (ridiculously low) interest credited to a savings account each month, returns in the financial markets are neither regular nor predictable. Often they come in short, but powerful bursts. If you're not on the train when it leaves the station, you're left behind.

Here's the discouraging part of the EBRI report: while we're getting better about rolling over our retirement plan money, only 10 percent of us who are eligible to make an annual contribution to an IRA do so. Let me re-state this:

Each year, 90 percent of us are not setting aside any money at all in our IRAs.

The biggest reason people cite is, "I can't afford to." But when asked if they could save $5-$10/week, they overwhelmingly say "yes."

Ten bucks a week translates into $520/year. If you put this money in an IRA and the investments inside it earned 8 percent/year, after 20 years you'd have $23,776. Certainly, it's not a fortune. But maybe enough to take a couple of nice trips, or buy a new car, or pay some medical bills.

Saving just $20/week, or $1,040/year in an IRA that earns 8 percent annually would leave you with $47,592 after 20 years. Now we're talking serious money. Enough for, not one, but all of the above.

It's very simple: the more you save, the more choices you have in retirement — which doctors you see, whether you take a plane or a bus to visit your grandkids, the neighborhood and home where you live, how often you eat out, and so forth.

For the 90 percent of us who are not saving for retirement, Copeland predicts "we'll see a great different income and ability to do things in retirement. Those at the low end will be scraping by."

I don't know about you, but that's not how I want to spend the last 30 or so years of my life.

While the maximum contribution you can make to an IRA for both 2006 and 2007 is $4,000 (add $1,000 if you're age 50 or older), don't feel as if it's not worth it if you can't contribute the full amount. Do what you can. Then sign up with a mutual fund company to have $20, $50, $100 — whatever you can afford — automatically deducted from your bank account each month and invested in your IRA. Increase this every time you get a raise.

"The most effective savers," says Copeland, "are those who have money taken out before it hits their checking account. It forces a discipline. They almost forget the money is gone because they really never see it."

If you're among the 10 percent who are diligently saving already, consider making your 2007 IRA contribution today. Don't wait until April 15, 2008. The sooner your money is invested, the sooner it can start earning a return for you.

In essence, the good/bad news is this: the quality of life you will enjoy in retirement is in your hands.

Think about this.

If you have a question for Gail Buckner and the Your $ Matters column, send them to:, along with your name and phone number.