Payback Approaches

Even when markets are in turmoil and gas prices are soaring, it’s important to return to a basic theme: Americans need to do a better job of preparing for retirement. After reviewing fresh statistics on the topic, I can’t help but think that we are paying for the sins of the past two buoyant economic decades in spades right now.

Think about it: first the stock market roared higher, then the housing market exploded, both of which masked a fundamental problem—Americans got out of the habit of living within their means and saving. Compounding matters, a large swath of folks piled on loads of debt, making an already problematic situation dire. As the credit crisis and housing collapse continue to unfold, the long term effect is gripping the national retirement picture and payback is approaching.

Consider these facts that were recently released:

-28% of workers age 55 and over have less than $100,000 in total savings and investments (Employee Benefit Research Institute)
-Only 47% of workers have tried to calculate how much they will need in retirement (EBRI)
-43% of surveyed workers GUESS at how big a nest egg they will need, while 19% seek the assistance of a financial adviser and another 19% calculate their own estimate (EBRI)
-7% of workers are saving the maximum amount allowed in their 401 (k) plans (Financial Engines)
-18% of workers borrowed from their 401 (k) plan in 2007, versus 9% in 2005 (Boston College Center for Retirement Research)

Considering that the average Social Security benefit for retired workers is $1200 for men and $900 for women, many are facing an uphill battle when it comes to retirement --- and the problem is likely to escalate until Americans change their behavior. Wally from Cranston, RI, my favorite radio listener (and frequent contributor of excellent ideas) offered a simple formula that I have tweaked a bit to help people quantify the retirement challenge: WPK+BA+P/A=DR.

To spell it out: work place 401(k)/403(b) 457 plans + brokerage accounts + defined benefit pensions/annuities = delightful retirement. Work towards maxing out your retirement plan first, then add to brokerage accounts if cash flow allows, although for the majority, step #1 will be hard enough. If you are lucky enough to have a defined benefit plan, then there is a bit of icing on the cake. Payback is never easy-let’s get going!