When it’s time to think about the future, many of us let our minds drift around the idea of a pleasant retirement — no more long hours at the office, tedious commutes or missed opportunities to have a little fun on the golf course, in the deer stand or simply sitting around with a good book.
But, and this is one big but, if you plan to retire one day, and you don’t really care for the taste of cheap dog food, you’re going to have to accumulate some money.
The recent advance in the stock market gives cause for optimism, but no serious student of the economy expects that we will return to the 25%+ annual increases of the 1990s. Indeed, if you want to amass enough money for retirement and other financial goals, you’ll have to do it the old-fashioned way: start slashing spending and socking away money for those Golden Years.
Savers, we aren’t
Americans are doing a lousy job of saving for retirement. In 2001, the nation’s savings rate was only 1.6%, down from 8.7% in 1992, according to the Commerce Department’s Bureau of Economic Analysis. With projections of stock market performance ranging around 7% to 8% and our dismal saving rate, many of us are headed for trouble.
The reality of lower stock market performance has not sunk in. Last year, the Index of Investor Optimism, a joint effort of UBS and the Gallup Organization, indicated that investors expected stocks to generate 18% annually over the next 10 years. Dream on!
It’s time to realistically plan for accumulating sufficient funds for retirement or be resolved to developing a liking for the meaty taste of Alpo. Tightening up the old belt and spending less is the only answer to the problem.
Actually spending less has dual benefits. First, and most obvious, spending cuts provides funds for investment. Second, and less obvious, lowering our standard of living now means we’ll need less income in retirement to support our less expensive lifestyle.
Saving smart means using tax-deferred accounts whenever possible. IRAs — either regular or Roth — 401(k)s or any other plan that defers taxes until retirement means more dollars are working longer. Plus, many employers match employee contributions to 401(k)-type plans.
Plenty of company, but…
If your calculations indicate that you simply can’t save enough to fund retirement by age 65, you might as well get comfortable with the idea of working beyond the traditional retirement age. Don’t worry. You won’t be lonely since lots of Baby Boomers are in the same boat and will be working right along beside you.
AARP, the watchdog association for seniors, estimates that families headed by 50 to 61 year olds had a median net worth in 1998 of $128,000, including home equity of around $55,000.
Since home equity is not a liquid retirement asset, these folks only have around $73,000 in usable assets. Under this scenario, these retirees can look forward to living off Social Security plus about $3,500 a year from retirement savings. Not a pretty picture.
Popular talk-radio host Dave Ramsey drills his listeners daily with the need to control our finances rather than letting them control us. His standard prescription is to get out of debt, set up an emergency fund and save 10%-15% of income toward retirement.
Now, that’s sound advice for all of us. No one has ever filed bankruptcy when they were debt-free.
My friend, Bill Hudson Jr., the CEO of Hudson’s Salvage Inc. in Hattiesburg, says that we can accomplish most anything if we have three things going for us: We need a goal, a plan and desire. That’s really all it takes.
Americans need to follow Bill’s advice and get themselves some financial goals and a plan for making those goals a reality and stick to the plan. Toughening up a little now will make a world of difference in the years to come.
What does the future hold for prospective retirees?
John Gist, associate director of AARP’s Public Policy Institute, sums it up this way. “The top quarter is in very good shape for retirement. The people in the middle will be OK, if they have a pension. And the people in the bottom will be depending almost entirely on Social Security. It’s not a pretty picture, especially for people in the bottom half.”
So, what will it be? Alpo or a comfortable retirement? The choice is ours, and we will either enjoy the benefits or suffer the consequences.
Thought for the Moment — I no longer ask the young man’s question: How far will I go? My questions are now those of the mature person: When it is over, what will my life have been about? — Rabbi Harold Kushner
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at email@example.com.