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Are we underprepared for retirement?

Greg McBrideThe burden of retirement savings is increasingly on the employee and less on the employer with each passing day. With employees responsible for their own retirement savings, and pensions becoming a rare breed, are we prepared for retirement? Some recent statistics emphatically indicate that we are not.

According to the Employee Benefit Research Institute's 2005 Retirement Confidence Survey, 51 percent of workers age 55 and up have saved less than $50,000 for retirement -- not including the value of a primary residence. And 39 percent of workers in the same age group have saved less than $25,000 for retirement.

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A separate survey by Thrivent Financial for Lutherans estimates that one in five pre-retirees age 50 to 64 has less than $5,000 accumulated for retirement.

Excluding home equity provides a snapshot of just how much saving for retirement has, or has not, been done. Since this is an asset that is tied up in the home, it is not as liquid as other investments. Sure, a retiree can borrow from it in the form of a reverse mortgage or a home equity line, but a reverse mortgage comes with hefty transaction costs and a line of credit incurs interest charges and requires monthly payments.

Home equity constitutes the majority of wealth for the average retiree -- some might argue too much -- so let's not ignore it. The accumulated equity can be a valuable source of retirement funds for those willing to relocate to a less-expensive area in retirement, cashing out home equity in the process and adding that to the nest egg.

Aside from relocation or downsizing, what else might close the gap?

The expected inheritance of the baby boomers has been regarded as the largest generational transfer of wealth in history. According to Trendscape 2004, boomers will inherit $1 trillion in the next decade. However, skepticism surrounds the reality that such a wave of inheritance will actually save the day.

A 2000 Economic Commentary by the Federal Reserve Bank of Cleveland casts doubt on such projections for a handful of reasons, including longer life spans that will devour more of what might have been left to descendants.

In addition, the size of inheritance has a direct relationship to the net worth of the family bequeathing it. In other words, those getting the largest inheritances may be those that need the infusion least. For many of the pending retirees on the wrong end of the savings statistics, an inheritance is something that other people will get.

So what can pre-retirees do now to allow for a better retirement tomorrow? In the EBRI survey, more than half of those behind in retirement savings cited "high expenses" as a reason. Cutting expenses is a productive, albeit obvious, choice. No pain, no gain, as the saying goes.

But how can we expect to arrive at the intended destination if we don't know where we are headed? The EBRI survey noted that only 42 percent of workers have calculated what they will need in retirement. My 11th grade English teacher was fond of the expression, "fear motivates." A calculation of what is needed to retire may instill the fear that motivates workers to trim expenses and accelerate saving for retirement. Use Bankrate's How much will I need to retire? calculator to determine what you will need to retire and then the How do I reach my retirement goal? calculator to help you get to that goal.

Those that are behind in retirement savings must resist the temptation to pursue overly aggressive investments as a way of catching up. If you're getting a late start, the important thing is to save, as the amount you save, rather than the rate you earn, has a greater bearing on your total retirement nest egg.

For example, a 55-year-old that starts by saving $5,000 in each of the next 10 years, earning an annual return of 5 percent, ends up with $62,889 before figuring any impact of taxes. Of this total, $50,000 comes from contributions and $12,889 from investment earnings.

Starting to save for retirement at a younger age introduces the element of compounding. A 25-year old that invests $2,000 each year for 10 years, then stops, ends up with nearly $65,000 more than someone that starts at age 35 and invests $2,000 per year for the next 30 years. Both investors earned an average annual return of 8 percent, but the investor starting at age 25 invested only one-third as much as the investor that started at age 35.

Unless you're fortunate enough to count on an inheritance bailing you out of retirement misery, the best solution is to spend less and save more.

-- Posted: May 31, 2005




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