With 25 years to go,
it's time to kick savings into high gear
underneath the mountain of mortgage payments, car loans and staggering
costs to raise children, some people in their 30s and 40s don't
give retirement a second thought -- other than hoping to hit the
But with about 25 years to go before
retirement, it's time to put aside the distractions for a moment,
assess where you are and make mid-course corrections.
"The most important thing that someone can do
to plan for tomorrow is really get an understanding for where they
are today," says Ross Levin, author of The
Wealth Management Index.
"The biggest issue when you're in your 30s and
40s is that everyone has several competing issues," he says.
"You're raising a family. You may need to take care of your
parents because they're reaching an age where they may not be able
to support themselves, and then you're trying to take care of your
But this is the time for a midpoint check. Experts
say you should start to curb debt, beef up your savings and start
learning the mechanics of retirement, including Social Security
and pension rules.
The very first lesson to learn is the Rule of 70:
Experts in retirement planning say that you'll need to replace at
least 70 percent of your final pre-retirement income to maintain
your standard of living. So now, while there's still time to adjust,
start looking at how you're coming along in adding money to the
post-retirement kitty -- from Social Security, pensions and savings
Can you depend on Social
Assuming that Social Security remains solvent, people age 40
or younger can expect it to replace roughly 25 percent of their
current income, says Mari Lynn Cheatham, a certified financial planner
with the Georgia Society of the Institute of Certified Planners
The amount will vary -- Social Security pays more
to high-wage earners than low-wage earners. You can obtain a snapshot
of where you stand now by requesting a Personal Earnings and Benefit
Estimate Statement from the Social Security Administration's Web
site. The document estimates your future Social Security benefits
and tells you how to qualify for those benefits.
Save with 401(k)s, IRAs
The second part of your retirement income will be savings. Now
is the time to maximize contributions to your retirement accounts
-- either a company 401(k) plan or your own Individual Retirement
Account. The beauty of these instruments is that the interest they
earn accumulates on a tax-deferred basis until the funds are withdrawn.
The 401(k) plans have become wildly popular for good
reasons: Contributions reduce an earner's taxable income, the plans
are usually funded via painless and automatic payroll deductions,
and companies often match a portion of their employees' contributions.
IRAs offer the same tax-deferral advantages to people
who do not have a company pension plan. An individual may contribute
up to $3,000 per year, with the earnings tax-deferred until withdrawals
begin at age 59 1/2 or later. Anyone can open an IRA, but people
who are not eligible for a pension are allowed to deduct their contributions
from their taxable income. Others make contributions to an IRA on
a non-deductible basis.
Once you start contributing, don't be tempted into
spending. Retirement accounts work only if they remain intact. If
you do need the money, consider the tax penalties. First, you must
pay income taxes on the amount you've saved. Then, if you are under
age 59 1/2, you're assessed an additional 10 percent penalty for
At the very least, you can set up your own automatic
savings plan. Ask your company's human resources department to arrange
to have a reasonable amount of money deducted from each paycheck
and deposit it into a savings account or money market account. True,
these items have low interest rates but regular contributions of,
say, $50 twice a month for 25 years equals $30,000 by the time retirement
nears. And whenever you receive a bonus, tax refund or other windfall,
consider putting 50 percent of it into savings.
Learn pension plan details
If your company has a pension plan, it's time to find out the
In traditional pension plans, payments are typically
calculated by multiplying the years of service by a percentage of
pay earned in the last few years of work. This formula favors employees
who stick with a company for a long time -- when pay is much higher
in their latter years -- vs. employees who don't stay as long.
Pension plans vary widely, but the calculations usually
share the same elements: The final year's salary, years of service
and the "retirement fraction." For example, if a person
worked 15 years at a company, ending with a $40,000 salary, and
the retirement fraction was 2 percent per year, a typical formula
would multiply the 15 by .02 by $40,000 -- giving the employee $12,000
a year, or $1,000 a month, at age 65.
A common variation on the formula makes the final
years of work even more valuable -- and severely punishes workers
who stay only a few years. Using the example above, the first 10
years might have a retirement fraction of only 1.5 percent, the
final 10 years 2.5 percent.
A company's vesting rules can also present a pension problem for young
people whose careers have taken off. Switch jobs too often and you'll
get no pension at all. Companies commonly require workers to stay
on board for a set number of years before any retirement vesting begins.
If that rule says five years, and you quit after four years and 364
days, your pension is zero.
So know the vesting rules at your firm and look before
you job-hop. If you're in an occupation in which frequent job switches
are common, you had better be paid well enough to have substantial
savings to carry you into retirement -- because there won't be any
pension money to help.
Pension plans commonly allow early retirement -- for
a price. If you retire at age 60 instead of 65, many employers will
cut your benefits by a third, and by half if you depart at age 55.
Don't forget your insurance
People with families should also consider their insurance needs.
The rule of thumb is that a full-time worker with children should
be insured for at least seven years of net, after-tax income, says
Randall Guttery, assistant professor of finance at the University
of North Texas.
But as with most rules of thumb, there are plenty
of exceptions depending on your age, the ages of your beneficiaries
and your net worth.
You might also want to consider long-term disability
insurance, which replaces your salary or wages if you are disabled
before retirement and can't work. Without such insurance and without
a job, you'll have trouble saving anything for retirement. Experts
say that you're much more likely to suffer a disability than die
before your retirement years.
Keep spending in check
Even good faith efforts to save can be thwarted by out-of-control
spending. But the key is to build a realistic spending plan for
day-to-day expenses and still tuck some money away for long-term
goals such as a college education for the kids and retirement. This
is not the time to rack up more debt. Keep credit card bills to
minimum. Adopt a pay-as-you-go strategy whenever possible.
Too often, people spend more than they earn and end
up reaching for credit cards to make up the difference. It's easy
for things to get out of hand, says Meg Green, a certified financial
planner in Miami. "That's when you have to think about the
future, about kids' college, about the house, about the business."
Hand-in-hand with curbing spending is setting up a
realistic budget. At this age, if you wait 10 or 15 years before
considering how much money you'll need for retirement, you run the
risk of not saving enough. If we have a 3 percent inflation rate
for each of the next 25 years, today's $100 trip to the supermarket
will cost $209.
being buried in house debt
Finally, this is the age when most people are calf-deep in paying
off their mortgage. Experts say it becomes a bit easier to make
payments and set money aside for retirement.
Still, most retirees these days are living longer
-- and showing a distinct unwillingness to trade down to skimpy
retirement homes and the occasional shuffleboard game. Because it
takes more savings now to support a big house and an active lifestyle
later, consumers have to be extra careful not to overextend themselves
when it comes to housing.
That may mean keeping the mortgage manageable so some
money can keep flowing toward retirement accounts.
Lucy Lazarony, Michael D. Larson
and Holden Lewis also contributed to this story.