No Need To Hit The Panic Button

Sure, saving for retirement seems daunting. But follow a few basics, and you'll have enough cash to bring your dreams to life.

Baby boomers are seen as spendthrifts, credit-card addicts unable to deny themselves any pleasure, blithely ignoring the need to save for old age. "The boomer culture doesn't lead to saving for retirement," says Ann A. Fishman, president of New Orleans-based Generational Targeted Marketing. The vision of an aging group of 76 million heading toward financial catastrophe is deeply disturbing. Yet it could well be wrong. An impressive body of economic research paints a far more benign picture of the graying generation that makes up more than a quarter of the U.S. population. Many of those who rocked at Woodstock 35 years ago have accumulated more real wealth and earn more real income than their parents did at a comparable age. Boomers are also saving at roughly the same rate as their parents, suggesting they'll have more to tap after saying goodbye to their workmates. This generation is also expected to inherit at least $10.4 trillion, though most of that money will be highly skewed toward the rich.

As for those who come up short in their budgeting, working even a few years past traditional retirement age can dramatically boost a household's bottom line. A projected shortage of younger workers over the next two decades means that sixtysomethings should be welcome in the labor force. "There is no need to live in fear that you are going to be penniless in retirement," says Meir Statman, finance professor at Santa Clara University in Santa Clara, Calif.

If that's the case, why is it that conversations about retirement at work and neighborhood barbecues so often turn into litanies of woe and dark humor? Certainly, some segments of society are vulnerable, such as poorly educated, low-skill workers. Concerns persist about the long-term financial stability of Social Security and Medicare. But for most people, from the worker on the factory floor to the professional with a corner office, the apprehension stems largely from not knowing how much is enough to fund a lifestyle, let alone medical bills. Feeding those worries is the financial-services industry, which in large part is designed to lure your retirement dollars. The Wall Street marketing machine is adept at boosting its bottom line by stoking concerns about poor saving habits.


Yet most people should find themselves with room for maneuvering later in life. All they need to do is follow some basic savings strategies and take a broad perspective on investment, including building skills employers value. Most important, by carefully thinking through "What really matters to me?" future retirees will devise sensible answers to the question of how much is enough. "People are very creative at coming up with solutions that work for them," says Ralph Warner, author of Get A Life: You Don't Need a Million to Retire Well.

In the 2004 edition of BusinessWeek's Retirement Guide, we'll help you organize your thinking about your next stage in life and develop strategies to make it happen. We'll show you how to know whether your nest egg will be adequate and introduce you to mutual funds that can help you accumulate it. If you would like some new environs for your next stage, we'll suggest some intriguing places.

The standard yardstick for retirement is that households need to generate around 80% of their preretirement income to maintain their standard of living. In a study by John Karl Scholz and Anath Seshadri, economists at the University of Wisconsin, and Surachai Khitatrakun of ERS Group, an economic consulting firm based in Tallahassee, Fla., 80% of households were found to be saving enough. The latest studies on retirement preparedness take a broad measure of wealth, incorporating homeownership, projected Social Security income, pensions, and nonretirement savings, for example, as well as the impact of financial setbacks such as an unexpected illness, a job loss, or a divorce.

Similarly, Barbara Butrica and Cori Uccello of the Urban Institute forecast that current retirees (those born 1926-1935) should have a median wealth of $448,000 at age 67, measured in 2003 dollars. That compares with a projected $520,000 for near-retirees (born 1936-1945), $589,000 for early boomers (born 1946-1955), and $609,000 for late boomers (born 1956-1965).

Not surprisingly, the well-heeled households are doing much better. The wealthiest 20% of current retirees, near-retirees, and early boomers can count on about 127% of their preretirement income in their golden years. The late boomers should have retirement income that's about 117% of their working years' income.

Those who regularly set aside money in retirement accounts are emerging from the turmoil of recent years in reasonable financial health. Workers' nest eggs did better than the stock market, according to the Employee Benefit Research Institute/Investment Company Institute 401(k) database. The database includes 15.5 million active 401(k) plan participants in more than 46,000 plans with $619 billion in assets as of 2002 (latest available data). From yearend 1999 to yearend 2002, the value of the 401(k) plans of workers in their 50s dropped by 15%. That compares with a 38% plunge in the benchmark Standard & Poor's (MHP ) 500-stock index. And since the S&P has delivered a 25% total return since then, those accounts should be in even better shape.

One factor shoring up portfolios was the flow of new money into 401(k)s with every paycheck. Equally important was that employees have also crafted well-diversified portfolios with 62% of the money invested in equities and the remainder parked in fixed-income securities. Diversification pays.

The sizzling home market has been a boon to household wealth, too. Median home prices have surged some 32% from the first quarter of 1999 to the same period this year. The long-term outlook for residential real estate plays a critical role in judging the adequacy of retirement savings. For example, Scholz, Seshadri, and Khitatrakun estimate that the 80% of households who are doing well shrinks to 58% when the scholars include only half of home equity. That suggests a generation's retirement prospects could sour if home prices crash.


Still, the fear of a collapse in residential real estate seems overblown. The strongest single predictor of the direction of home prices is household income growth, and in 42 states that growth explains all the price increases in housing of recent years, says Karl E. Case, economist at Wellesley College. The spectacular price spiral that dominates the headlines is confined to eight states, including Massachusetts, New York, New Jersey, California, and Florida. Markets in those states risk a plunge in prices, he adds, but everywhere else prices are more likely to simply stall for a considerable period. Overall, taking into account long-term forecasts of income growth, the housing market should appreciate at a 4% annual rate, or 2% after adjusting for inflation, figures Mark Zandi, chief economist at

But what if savings are less than hoped for, maybe from a lifetime of bad habits, bad luck, or bad timing? For many people the answer to any deficit is, "Yes, I will work longer," says Laura Tarbox, president of Tarbox Equity, a financial planning firm in Newport Beach, Calif. Smart move, since the impact of earning a paycheck into the traditional retirement years is financially dramatic. The main reason is that an investment portfolio has more time in which to grow before you start drawing on it. The idea of working in their golden years is attractive to boomers, too. According to the latest baby boomer retirement survey by the AARP, 80% of respondents said they expect to be gainfully employed full- or part-time, or even start their own business, late in life.

In the Information Age, work should be less of a physical burden, especially with the population better-educated and healthier than previous generations. And demographic pressures should encourage employers to welcome older employees. Anthony Carnevale, a job expert at Educational Testing Service, predicts a skilled labor shortage of some 5 million in 2010 and 14 million by 2020. "Many of my clients expected to work part-time in retirement," says Marc Collier, a certified financial planner at Wellesley Financial Architects in Wellesley, Mass. "They've been surprised at how much they are in demand for consulting work."

Working longer can give a retirement plan a powerful boost. Take an executive who's 46 today, with nearly $600,000 in retirement and nonretirement accounts. At age 60 with more than $1.6 million, he would be able to take out $115,000 a year (in constant dollars) from his portfolio, according to Financial Engines, a Web-based financial planning firm. Staying on the job until age 65, though, could boost his take by more than 50%, to $178,000.

Earning money in retirement certainly works for Fred Henry. By the early 1990s, he had worked for Bechtel Corp. for three decades, lately as a project manager in the power plant business -- and he was itching for a change. When he read a magazine article about a financial planner, he knew immediately what he wanted to do. He enrolled in financial planning courses at University of California at Los Angeles, left Bechtel, and earned a number of critical licenses and certificates in the financial-services business. Now 68, he works full-time as a certified financial planner in Torrance, Calif. Says Henry: "I wanted to get out of corporate life, and do something I'm interested in, and be independent."

While the overall trend in retirement savings is positive and work provides a crucial safety valve, how does anyone figure how they're doing right now? Are you putting enough into retirement savings? Do you have too much in stocks or too little? What if you only started saving in your fifties? The short answer is there is no magic number, no infallible rule of thumb that solves the retirement savings equation.


But there are good strategies. Start asking yourself what kind of life do you want to lead? What do you want to do? Do you intend to stay in your community, or do you dream about moving to another state or county? Is traveling the world your vision of the good life, or is it making a career shift? Later you can total your 401(k) statements, mutual-fund quarterly reports, mortgage payment schedules, savings simulations, and other financial figures.

Most people find that in the end, their vision of a good retirement is a variation on the life they've lived and the activities they've enjoyed all these years. "If you're given to T-shirts and blue jeans, you won't want to hang out at the country club," says Ross Levin, president of Accredited Investors, a financial planning firm in Edina, Minn. Adds Carl Goodin, a certified financial planner at Financial Planning Associates Inc. in Chesterfield, Mo.: "I have clients who have planned and retired comfortably on an amount of money that, for another client, would hardly pay the country club dues."

The basic financial planning guidelines kick in once you have developed a lifestyle road map. Own your home. Keep debt under control. Fund your 401(k) or similar retirement savings plan to the maximum and, assuming you meet the income requirements, an individual retirement account. The new law that put a lid of 15% on taxes on dividend payments is a powerful incentive to establish a taxable account for long-term savings, too. "You don't get anything better than this," says Christopher Wolfe, managing director and global head of equities for JPMorgan Private Bank. "High-quality companies, dividend payers, are an efficient way to save for retirement."

The mantra of financial planning is diversify, diversify, and diversify. The strategy of spreading money among stocks, bonds, international securities, cash, and other assets limits downside risk. Many investors are adding to their portfolios securities that safeguard against inflation, since rising prices erode the value of a dollar. The U.S. Treasury sells two fixed-income securities specifically designed to compensate holders for inflation as measured by the consumer price index. One is the Treasury Inflation-Protected Security, better known as TIPS. The other is a kind of savings bond, called I-bonds. Neither will produce dazzling returns, but they guarantee your capital will not be lost to inflation.

Managing money well is important. But for many people the most important investment they can make during their working years is in gathering the skills, education, and contacts they need for the work they want to do in retirement. And even though there are legitimate concerns about the financing of Social Security and Medicare in coming decades, most economists agree the elderly can rely on both safety nets being there to help out. Higher productivity growth will make paying the bill easier than anticipated only a few years ago.

Most Americans can afford to grow old. Along the way, individuals will be forced to make adjustments to portfolios, savings strategies, and expectations. Lots of things can go wrong, too. Some retirees will face enormous financial hardship from a lack of money, ill health, or both. But for the vast majority of society, old age is simply another stage of life with its own challenges and rewards.

By Christopher Farrell

    Before it's here, it's on the Bloomberg Terminal.