Financial Savvy – ‘start Early, Save More’

In 2006, the first of the roughly 80 million baby boomers turned 60. My generation is rapidly and inevitably heading toward that dreaded "R".  But, of course, our retirement won’t look anything like our parents’ retirement. We’re going to be healthier and more active; we’ll travel and golf; we may explore second careers and entrepreneurial ventures. We might even go back to school just for the sheer joy of learning. Our retirement years will be filled with all the things we didn’t have time for during our work years.

So what’s the problem with that picture? Evidence suggests that my incredibly optimistic generation has the dream, but hasn’t necessarily laid the groundwork to make that dream a reality.

A recent national survey of household finances showed that more than one-quarter of all boomers have not begun to think about retirement planning at all. Many boomers won’t have enough money to support their rosy vision of retirement. However, that survey also showed that the households who had even engaged in a little planning had vastly more accumulated wealth than those who had not done any retirement planning.

A different national survey focusing on retirement confidence supports this disconnect between attitudes and action. More than two-thirds of surveyed workers last year reported being very confident or somewhat confident of having enough money to live comfortably throughout their retirement years and 70 percent report said that they have saved for retirement. But more than half of those who report doing so have total savings and investments of less than $50,000. For the 55+ age group, only 26 percent had more than $250,000 saved and 36 percent reported less than $10,000 in savings.

So the message is clear. We need to get busy if we want to be able to be able to afford that "new retirement."  Although many may assume that employer-provided benefits and social security will provide sufficient retirement income, the trends are toward more individual responsibility for retirement saving. Old-style defined benefit pensions are becoming a thing of the past. Employers are increasingly switching to plan designs that require workers to step up to the plate.

So my advice for today is: Start early and save more.

If you’re already one of those boomers nearing retirement without sufficient resources, you obviously can’t start early, but you can focus on saving more. The alternative is that you’ll be working longer or retiring with a lower standard of living. For younger readers, there’s plenty of time to get your retirement plan in shape.

Here’s a few suggestions for making your dreams a reality:

1. Get the full match from your employer.  Evidence suggests that a large percentage of match dollars are left on the table by workers who don’t contribute enough to get them. Think of an employer match like getting a 100% return on your investment the first year. This should be "an offer you can’t refuse."

2. Whether you are saving inside or outside an employer plan, try to maximum allowed by law.  For 2007, you can contribute up to $15,500 (plus $5,000 catch-up, if age 50 or over) to tax deferred plan like a 401(k). The IRA limit this year is $4,000 (plus $1,000 catch-up, if age 50 or over). If you can’t do it now, work toward this goal over time.

3. Don’t delay. Early contributions give you the most bang for your buck. Consider a person who contributes $4,000 to an IRA each year, beginning at age 22 versus age 32. At 6 percent investment return, the late starter will have accumulated $445,739 at age 67 (35 years of investing). The early bird, with only ten extra years, will have $850,974–almost double.


Vickie Bajtelsmit, Professor of Finance

Colorado State University College of Business