July 28, 2007

Cat Food, People. Cat. Food.

THIS WEEK, FIDELITY INVESTMENTS released a rather alarming study that found people aren't saving enough in their 401(k) accounts. While I fully admit the cynics among us might quip this "news" is about as alarming as word the sun rises in the east, it's the numbers contained within the study that are cause for concern.

Typical Baby Boomers -- who are now between the ages of 43 and 61 -- have $38,000 in their 401(k) accounts, according to Fidelity, which is in a good position to know these things. $38,000. Typical Generation Xers -- that would be my generation, between the ages of 27 and 42 -- have just $15,000. Typical Generation Yers -- those between the ages of 18 and 26 -- have a pathetic $2,100 saved. While average balances are much higher -- respectively, $89,000, $34,000 and $6,000 -- this is because higher-earners are skewing the pool.

So, I'll say it again. $38,000. It's a figure that ranges from unnerving at best to catastrophic at worst. Let's do some quick calculations and show why.

If we assume a typical worker is making $50,000 per year, and saves 7 pc of his income in a 401(k) -- that's roughly the average deferral rate -- that works out to annual contributions of $3,500 per annum. If we assume post-inflation growth of 5 pc per year, a 43-year-old starting out with $38,000 will have about $270,000 at age 65. Under the four-percent-rule (a good rule of thumb to prevent inflation and withdrawals from eating your account), this would generate retirement income of $10,800 per year or $900 per month. Before taxes. Now, that's not bad, especially if folks can draw on other sources of retirement income, like pensions and IRAs and Social Security -- but I bet a lot of folks would prefer it to be higher. I mean, I think folks would want to have fun in their retirement, and not have to content themselves with watching daytime television.

On the other hand, if you're 61 and have $38,000 in your account, that will add up to just $61,000 or so when you're 65 and get your gold watch. That works out to income of $2,440 per annum or about $200 per month. Before taxes. If one has plenty of other income, that may not be a concern; but I have a feeling that most folks in this spot will end up relying -- God help them -- on Social Security to pay most of the bills. As time goes on, and emergencies and other matters cause the money to run out, this will almost certainly mean the retiree will end up living in some soulless high-rise housing project, where narcotics dealing takes place in the stairwells and the poor residents end up seriously considering Fluffy's supper so they can afford their medications.

So Baby Boomers should save more. But younger people shouldn't take it easy either. After all, this is the best time to save because we're not dealing with college educations and the kids' braces and kitchen renovations. Besides, let's be perfectly honest -- we're completely hosed when it comes to Social Security. (The program is expected to go broke about when I retire, so I'm figuring that a restructured program will pay me about half what I'm "owed" under current rules.) So, we should save more to reflect the fact our Government is going to ream us accordingly.

Of course, there's always the question of how much one should save. Since everyone's circumstances are different, it's a number that everyone must calculate for themselves; but when it comes to a 401(k) plan, I've always liked the 10 pc number. For one thing, it's a nice round number, and if you know me I am all about that. For another, it's enough to ensure a lot of savings while not going overboard with the 401(k), which is just one pillar of a retirement strategy. For a third, saving 10 pc in a 401(k) will eventually mean not missing that 10 pc in one's pay, which will result in a nice surprise come retirement time and you've got more money than you had anticipated needing.

When you're getting your gold watch and a hearty handshake, you'd rather have a nice surprise in store than a not-so-nice one.

(via Boston Gal's Open Wallet)

Posted by Benjamin Kepple at July 28, 2007 12:01 AM | TrackBack
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