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July 12, 2006
Quit buying so much crap and cashing out those 401(k)s
Until the 1980s, Americans saved over 10% annually. Now, we have a negative savings rate - we spend more than we save. Study after study says the same thing - Americans are going to live much longer and be much poorer in retirement than ever before. Let's review:
Employee Benefit Research Institute
More than half of Americans over 55 have less than $50,000 saved.
Fidelity Retirement Index
The average household is set to replace 57% of their income in retirement. So a household used to living on $50,000 per year better be able to squeak by with $28,500 in retirement.
Putnam
Surveying retirees, they found, "Seventy percent wish they’d saved more and 59 percent wish they’d started saving earlier. Their biggest surprise? That they have insufficient income and high expenses." The scary part - these retirees are part of a group that saved MORE than people save now. Listen to your elders!
Nationwide Financial
One in four eligible Americans don't participate in a 401(k), households save just 0.1% of disposable income, and yet "59% believe they have a plan and are saving enough for retirement." Unfortunately, "there appears to be a contradiction in what people say and what they actually do". Uh, yeah. We know. They like $5,000 plasma screen TVs and $1,000 spinner rims for their low rider Honda Odysseys. That stuff is important.
Guardian Life
"Boomers also tend to think they will be able to make a few big deposits to their retirement savings later in life, rather than many small deposits over the course of a working career." Yeah, like after they win the lottery, a rich relative dies, they make it onto "Deal or No Deal", ...
Look, America, you buy too much crap (well, the studies don't say what we spend our money on, but, I've seen the cars you drive, the furniture you sit on, and the entertainment systems you can't live without, and, yeah, it's crap). About 1/3 of Americans invest regularly. Those other 2/3 had better get used to a lot more Spam and a lot less filet mignon in retirement.
I've seen two popular, but conflicting, rules of thumb of how much you need to retire: The first rule: you need about ten times your annual salary saved up at retirement. So if you're used to a $50,000 per year lifestyle, you need about $500,000. The second rule I've seen: you should be able to pull out about 4% of your savings each year and make your money last through retirement. So if you're used to a $50,000 per year salary, you'll need about $1,250,000. However, that doesn't account for inflation, but social security could make up the difference (yeah, right).
No matter the amount you need, it's a lot. Here's a three-step program to get started:
1. Enroll in your company's 401(k)/403(b).
2. Save a lot - 10% of your gross salary is a good start.
3. Get market returns - that is, don't put all your money in bonds and CDs. You've got to buy stocks.
This third step doesn't mean you have to beat the market or even do a lot of research. Invest in index funds like Vanguard's Total Stock Market Index or the S&P 500 Index, and you're done. Vanguard walks you through the process step-by-step.
Okay, now go apply for this pretty decent American Express Rewards Card so I can make some money off the affiliate link and keep telling you what to do and you can ignore me and go buy some more crap.
Posted by brian at July 12, 2006 02:04 PM
Comments
Here's an SNL skit with Steve Martin along those same lines.
Posted by: bill at July 16, 2006 09:48 AM