Are You Retirement Ready -- Or Not?

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Dear Friends
I have a confession to make: I'm a pack rat. Make that a selective pack rat. I keep files of information — reports, press releases, studies, etc. — on all sorts of financial topics. But the biggest file by far is the one labeled: "Retirement." It takes up a full drawer. When fresh research crosses my desk, I go through the drawer, cull out older information and add the new.

That's what I was doing when a pattern of sorts emerged. But rather than tell you what I've concluded, I thought I'd lay out the bare facts and ask you to tell me what you think it means. Here are some recent tidbits:

— On average, 45 percent of American workers do not participate in their employer-sponsored retirement plan. 24 percent say it's because they have "other" financial priorities.

I wonder if those other priorities are going to mean much when they're 70.

— Lack of participation is higher for younger workers. Among those in their twenties, more than half forego participating in their company plan, despite the fact that the younger you start saving, the more you'll end up

with. (Or, to look at this another way, the younger you start saving, the less you have to save.)

— The Profit Sharing Council of America (PSCA) estimates employees leave as much as $30  billion on the table because they either contribute nothing or don't contribute enough to take full advantage of the matching contributions employers are willing to make to their 401(k) accounts. That's free money.

To break this down to the individual level, let's take a very simplistic example. Suppose you earn $30,000 a year throughout your work life (age 25 to 65) and save nothing in your company plan. If your employer offers a 3 percent match and the average annual rate of return over those 40 years is 8 percent, PSCA calculates you're giving up $230,000 in employer contributions. That's nearly a quarter of a million dollars!

According to PSCA, "That $230,000 could buy a participant a 20-year payment during retirement of almost $23,500 per year," assuming your account, on average, earns 8 percent annually.

Of course, no one in their right mind would settle for earning the same amount of money over their entire career. Naturally, if your salary goes up, the amount of company contributions you're giving up also increases.

— Nearly half of all American workers say their total household assets — not counting their home — amount to less than $25,000.

— What's hurting our ability to save? Debt is a big factor. By preventing people from saving, today's high levels of debt have repercussions decades later when we find we don't have enough assets to generate the income we need in retirement.

As a result, senior citizens are increasingly financing their living expenses by saying "Charge it." Between 1992 and 2001, the average amount of credit card debt incurred by individuals those over age 65 nearly doubled to $4,041.

The increase in credit card debt was even higher among the newly-retired: Over the same time period, the average credit card debt of Americans 65-69 years old hit $5,884 per person — an increase of 217 percent.

Seniors are now the fastest-growing segment of the population filing for personal bankrupcy.

Most of us — 61 percent — have no idea how to estimate how much income we're going to need in retirement or how large a nest egg will be needed to generate that income. In fact, last year's survey by the Employee Benefit Research Institute (EBRI) found we devote more time getting ready for the holidays than planning for retirement. While 74 percent said they spent more than 4 hours on holiday preparations, only 49 percent said they spent that much time on retirement issues.

When people have a clearer idea of how much money they'll need, they become more disciplined about saving. (To get an idea, go to for simple one-page form that will help you figure out approximately how much you need to save. No tough math, I promise!)

— In the case of a married couple where both members are age 65 today, there is better than a 40 percent probability that one of them will reach age 90. That means they could need a retirement nest-egg that could generate income for 25 years!

— The more conservatively you invest your retirement portfolio, the more likely it is you will run out of money before you run out of life. This is what's known as "longevity risk." It's the risk of outliving your assets.

A study published in the Journal of Financial Planning looked at various investment combinations to see how long your portfolio would last if you withdrew just 4.5 percent per year and increased this for inflation on an annual basis. Turns out, a portfolio made up of 50 percent in bonds, 30 percent in cash, and 20 percent in stocks — the kind of investment mix many retirees feel they need in order to play it "safe" — produces exactly the opposite result: A one-in-four chance that you'll run out of money in 25 years and a 90 percent probability of running through your assets in 35 years.

Increasing the stock portion to 40 percent and cutting back bonds and cash to 40 percent and 20 percent, respectively, reduced the likelihood of running out of money in 25 years to just 8 percent. It also significantly improved the chances your portoflio would last longer. The probability this portofolio would last at least 35 years: 60 percent. (Remember, though, that while increasing the stock portion can boost results, it will also increase your risk exposure.)

— Separate surveys by the EBRI and AARP found that many workers have concluded that they only way they will be able to make up for the fact that they saved too little will be to work longer. Not a bad idea, considering most people in the workforce today will not be eligible for "full" Social Security benefits until they are reach age 67 or higher.

But nevertheless, the majority (51 percent) of workers think they'll be able to collect 100 percent of their Social Security benefits before they are actually eligible. Baby Boomers who start taking Social Security at age 62 will have their benefits reduced by 30 percent — not the 20 percent experienced by today's retirees. And the benefit reduction is permanent.

The Social Security Department's Web site has an easy calculator that lets you plug in different scenarios for when you want to retire and tells you how this will affect your Social Security benefit.

— At a symposium in August, Federal Reserve Chairman Alan Greenspan said that the growing "dependancy ratio" — the ratio of older adults to younger adults — "has been rising in the industrialized world for at least 150 years." He pointed out that in the United States this will increase dramatically in 2035 when the percentage of the population over age 65 is projected to hit 20 percent, roughly double what it is today.

"If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels," said Greenspan.

Translation: The "rules" that govern Social Security and Medicare — the rate at which you're taxed as a worker, the amount and age at which you're eligible to receive a benefit — need to be adjusted. And the sooner the better.

— This year, the fourth annual Allstate "Retirement Reality Check" survey found that, regardless of age, the biggest worry Americans have when it comes to retirement is the ability to afford health care. In fact, Gen-Xers were more concerned about this than either Baby Boomers or those already retired.

Still, we continue to be optimists when it comes to retirement. Fully 53 percent of us either "strongly" or "somewhat" expect it to be the best years of our lives.

Do you see what I see?

Take care,


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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.