MARKET COMMENTARY, 4th QUARTER, 2005
Dude, Where's My Retirement?
…as I tossed my old 2005 wall calendar into the recycling bin, I caught a glimpse of last January's New Year's resolutions, written in large red letters. Suddenly, it dawned on me…
“Uh oh… I've forgotten to save for retirement… again!”
If you can relate to this story, you're not alone. According to a recent survey conducted by the Employee Benefit Research Institute, more than half of all workers feel they are “behind schedule” when it comes to planning and saving for retirement. (1)
The Institute says that more than half of American workers have combined savings and retirement plan balances of less than $25,000 – an amount that is less than one year's income for a typical household. That's a serious shortfall, considering that retirement can last 10, 20, or even 30 years.
Sadly, there's no “quick fix” to the average American's shortfall. But the good news is that there are many retirement planning tools available for individuals who are motivated, creative, and willing to take a hands-on approach.
Building a Retirement Solution
Financial experts say most Americans will need 70-80 percent of their pre-retirement income to have a comfortable retirement. Using an income replacement approach, constructing a retirement strategy becomes somewhat like assembling a jigsaw puzzle, where the main funding “pieces” include savings, investment income, post-retirement wages, inheritance, private and public pension programs.
For most Americans, Social Security is an important contributor. According to the Center for Retirement Research, over the coming decades, Social Security is structured to replace roughly 37% of pre-retirement income for the average worker. (2)
However, due to the graduated nature of Social Security benefits, your actual benefits will vary. For example, a lower wage earner may receive over 50% of pre-retirement income, while a higher wage earner may receive less than 20% of pre-retirement income. For an estimate of your future Social Security benefit, visit www.ssa.gov/planners/
calculators.htm .
It may be wise to be conservative when setting your expectations for how much Social Security and Medicare will provide. Due to America 's aging population, these programs may face serious financial challenges over the next few decades. Should conditions deteriorate, benefit cuts, higher taxes, or other forms of restructuring are possible.
Traditional corporate pension and health plans can also provide a significant contribution. Unfortunately, many defined benefit plans have come under pressure lately, as the country's overall ratio of active to inactive workers in defined benefit plans has fallen to roughly 1-to-1, down from more than 3.5-to-1 in 1980. The Pension Benefit Guaranty Corporation, the federal corporation that insures the pensions of 44 million workers, warns that U.S. single-employer defined benefit plans are underfunded by more than $450 billion. (3,4) Concerned that the PBGC is approaching insolvency, the U.S. Senate and House of Representatives have begun crafting legislation to shore up the nation's private pension system.
Meeting the Inflation Challenge
Inflation is a major problem for retirement planners. In addition to eroding the current purchasing power of your savings, inflation can dramatically increase the number of dollars you will need to maintain the same standard of living in retirement.
For example, if your household's current income is $45,000 per year and you assume a 4.0% inflation figure, in 30 years you would need the equivalent of $145,953 to maintain the same standard of living.
To plug the gap, you may wish to consider a 401(k) plan, IRA, or other tax-advantaged self-directed retirement vehicle.
Online Retirement CalculatorsAARP's calculator. One of the best free tools available. Takes 3-5 minutes to run. NASD's simple, easy tool. Excludes Social Security benefits. Takes 1-3 minutes to run. |
How Much to Save?
If you're new to retirement planning, we suggest that you “warm up” by trying an online retirement calculator. To find one, try Googling “retirement calculator”, or try one of the ones mentioned in this article. In less than five minutes, you can be well on your way towards charting your retirement course.
Retirement calculators begin by asking for simple inputs such as your age, income, and planned retirement age. Then, based on your inputs, the calculator computes a sample investment plan that is designed to meet your goals.
We suggest you try a few different calculators, varying your inputs. Before long, you should be able to develop a ballpark estimate of how much you might need to save. However, please be aware that retirement calculators are for educational purposes only, and are not intended as investment advice. Before taking any action, we strongly recommend that you consult a qualified financial advisor.
Making Use of Your Employer's Retirement Savings Plan
Once you and your investment advisor have settled on a savings target, you will need to identify appropriate funding vehicles. An employer's 401(k) can be a good funding choice, as it provides a convenient way to automatically invest in a broad range of diversified investment products. Your employer can provide a description of what plans are offered, and direct you to the appropriate educational and enrollment materials. Or, alternately, you may wish to fund an IRA or another vehicle.
But most importantly, mark your 2006 calendar to “remember” to plan for your retirement.
We think you'll be glad you did.
Investment Committee
Northwest Capital Management
January 4, 2006
Past performance is no guarantee of future results. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Opinions are subject to change without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Northwest Capital Management, Inc. ©2006, Northwest Capital Management, Inc.
(1) Employee Benefit Research Institute's 2005 Retirement Confidence Survey.
(2) Just the Facts on Retirement Issues, Center for Retirement Research at Boston College , January 2005.
(3) Pension Benefit Guaranty Corporation Press Release, May 14, 2004.
(4) Pension Benefit Guaranty Corporation Press Release, November 15, 2005.