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Will you sink or float on Golden Pond?

Right now might be the perfect time to take a look at your retirement nest egg.

How much have you saved? How much will you need? When will you retire? Will you retire?

Maybe it's a long way off; maybe it's just around the corner. Whatever your stage of life, financial advisers unanimously agree on one point: The sooner you start saving toward what you'll really need, the better your chances of actually reaching your goal.

"People come to me thinking, 'I have a half a million dollars, I'm fine,' and I'm the one who points out to them that they're really not," says Barry Katz, Certified Financial Planner with Caratel Financial Services Inc. of Sunrise, Fla. "It comes down to maintaining a lifestyle. Sometimes they'll have to cut down on their retirement expenses or take a little more risk in their portfolio to make it."

What you'll need to "make it" is entirely relative, of course. Most financial advisers agree that whatever your income, you'll need roughly 70 percent of it annually before heading out to Golden Pond.

But barely half of us (53 percent) have even taken the time to figure out what our retirement goal should be, according to the 2000 Retirement Confidence Survey conducted by the American Savings Education Council.

We're among the world's worst nations when it comes to personal savings, so it should come as no surprise that our retirement coffers are not exactly flush, says Keith Leggett, senior economist with the American Bankers Association.

"Most Americans are not saving enough for retirement," he says flatly. "I think they are underestimating their needs for retirement."

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Measure the hole in your boat
Want to try something really scary? Calculate your nest egg based on your current rate of saving.

The fictitious Applebees did.

At age 50, they each make $40,000 a year. After raising two kids, they have $100,000 in home equity, they each contributed $2,000 a year to an individual retirement account during the past decade and they each can expect annual Social Security payments of $12,500.

Most financial experts estimate they'll need 70 percent of their current annual income each year to maintain their standard of living. They plan to retire at age 65 and estimate they'll live to enjoy a bucolic 22 years on Golden Pond.

First, let's check out Fidelity Investment's retirement calculator. In order to reach their retirement goal of $56,000 a year (70 percent of their current gross), assuming an inflation rate of 4 percent, a pre-retirement rate of return of 8 percent and a post-retirement rate of return of 7 percent, Bob and Betty are going to come up short.

Way short.

To maintain their lifestyle, they're going to need $494,044 in today's dollars. At the rate they're saving, they're going to end up with just $152,132, a shortfall of $341,912.

Their reality check: they'll need to find a way to tuck away roughly $17,075 a year, nearly a quarter of their combined income, if they want to stay afloat on Golden Pond.

OK, let's look at it a different way. Maybe if we consider Bob and Betty separately, they'll fare better.

Using the American Savings Education Council's Ballpark Estimator, we ran the Applebees through individually. It assumes a constant real rate of return of 3 percent after retirement.

All things being equal, they'll each need a nest egg of $254,199. At the rate they're going, they're each going to come up $222,199 short. To reach Golden Pond, they're each going to have to find a way to set aside $11,554 a year -- more than a quarter of their salaries.

Now you try.

(In addition, you may want to check out the Social Security Administration's retirement calculator to determine your exact retirement income.)

In the know vs. in the dark
OK, that was tough. If you're like most people, you came up with really scary numbers. Six-digit scary. Booooo!

You have also just increased your chances of retiring successfully.

According to ASEC's 2000 Retirement Confidence Survey, those who have tried to calculate how much they will need for retirement are better off financially than those who have not done the math. The survey found that 88 percent of those who have done the calculation are actively saving for retirement vs. 61 percent of those who have not. Those in the know also have saved a median $66,500; those in the dark have saved just $14,000.

"More Americans are saving every year, but in general they are not saving enough," says ASEC President Don Blandin. "People are saving, but they are saving blindly, simply trusting that they're putting in enough without really knowing how much they need to save to best prepare for the future."

The way we retire today
Granted, we didn't give the Applebees credit for the equity in their house, the major form of saving for most American families. Some would even argue that their home is their nest egg, and may expect it to appreciate say fifty- or a hundred-fold, just as their parents' did, by the time they retire.

Don't bet on it, warns Leggett.

"During the 1970s and 1980s, you had a lot of asset price appreciation in real estate values and they rose much more rapidly than the rate of inflation," he says. "This really did improve the financial lot of the World War II generation. You are not seeing the same type of appreciation in housing prices today. To count on that appreciation is not necessarily a good gamble. In fact, in some areas, housing prices might actually fall."

If the value of your house appreciates enough to offset property taxes and inflation, great. If it exceeds them, even better. But for the foreseeable future, there is little chance that you'll see an increase in value sufficient to single-handedly support you in your golden years.

Nor will pensions be there to bail out most of us. In today's work force, few workers will stay with one company long enough to earn one even if it's offered. That's why it's so important to max out any 401(k) programs your employers offer. And be sure to roll your balance into your next employer's plan when you move on. Remember: You are building your own pension. The sooner you start, the more help you'll get from accrued value, whether in equity performance or compound interest.

Oh, one more thing: Don't look for help from the kids. Experts predict they'll have even less money than you do, and in all likelihood it will have to take them further.

Don't retire -- repackage!
It doesn't surprise Ruth Hayden that most Americans are more likely to sink than float on Golden Pond.

Hayden, a financial educator and author of For Richer, Not Poorer: The Money Book for Couples, spends much of her time teaching financial planners the new realities of retirement.

Simply put, the challenge we face is not the money, it's longevity.

"People are still going by the old model where people retire at 65 and die at 68," she says. "As a female, if I get to age 50 without heart disease or cancer, I'm probably going to live until I'm 93. Very few people are going to be able to sustain themselves financially, mentally, emotionally, physically for a third of their life without anything. What, you take that trip you've saved for, you clean out the closets, you clean out the garage and then you wait to die?"

Hayden's got bad news and good news regarding the new retirement.

The bad news is, you're going to need to maintain 100 percent, not 70 percent, of your current income, and maybe a bit more to cover health care costs, to retire. The good news is, with a little ingenuity, you'll still be earning well into what your parents considered retirement years, working a comfortable pace at second and even third careers that feed your life instead of drain it.

Hayden's model for the new retirement may take some of the pressure off.

Divide the last third of your life into three sections: 60-70, 70-80 and 80-90. From 60 to 70, you still need to accumulate money or at least realize enough from investments to save money. From 70 to 80, you don't need to accumulate but you can't touch the principal. From 80 on, you call the shots.

"The trade-off here is we're going to live longer than our parents or grandparents," she says. "The challenge for us is in how we adjust to our longevity. The key to retirement is taking the part of what you do right now that is marketable and put it into a package that is easier and more fun, whether it be telecommuting, working two days a week or job sharing to mentor younger workers."

Oh well, you probably weren't going to fish every day on Golden Pond, were you?

-- Posted: Jan. 3, 2001


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See Also
A financial planner can help you
Bankruptcy legislation could endanger your retirement savings
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