The Big Squeeze
The pressure is on baby boomers saving for retirement. Many also face college tuition and caring for a parent
Yet academic research shows that retirees who want to play it safe can afford to withdraw only 4 percent to 5 percent of their nest eggs each year in retirement--if they want them to last for 30 years or more. Even a person with $250,000 could afford to tap only $10,000 or so annually.
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The good news is many young boomers, like David Fooshe, 50, are getting the message. Fooshe, an engineering project manager in Portland, Ore., has always made the maximum contributions allowed in his 401(k)'s and IRA s. But in recent years, he has also begun taking advantage of the so-called catch-up provisions in tax-deferred retirement plans. Next year, workers 50 and older are allowed to put an additional $5,000 into their 401(k)'s and $1,000 into their IRA s.
It helps to start the saving habit early. The Schwab Center for Investment Research concluded that all workers should start saving 10 percent to 15 percent of their income in their 20s. That way, they can maintain that rate all their working life. If you wait until your 30s to start, then you need to set aside 15 percent to 25 percent of your annual income for the rest of your career. Workers who haven't started by their early 40s will need to sock away 25 percent to 35 percent of their incomes annually to make up for lost time.
For many, this represents a huge undertaking. But keep in mind that if you're maxing out your 401(k) and contributing to an IRA, you may already be close to hitting 15 percent.
You may think you can play catch up with the stock market. Think again.
David Darst, chief investment strategist of Morgan Stanley's individual investor group, says today's young boomers are "facing relatively mundane and mediocre returns in the stock market." After a 20-year stretch of better-than-average returns, equities are likely to underperform in the coming years. He predicts annual equity returns of around 6 to 8 percent a year, well below their historic long-term average of more than 10 percent.
Savings edge. Moreover, Christine Fahlund, senior financial planner with T. Rowe Price, recently studied the probabilities of meeting retirement goals and discovered that saving more is far more effective in improving your odds of funding retirement than investing more aggressively.
But all is not lost. Young boomers have other assets at their disposal--such as real estate.
James Diamond, 48, has been buying real estate in recent years not for speculation but for income. Diamond, an estate planning attorney, purchased several rental properties in Southern California over the past two decades. When he leaves the workforce, he doesn't plan to sell those properties but rather to use their rent as supplemental income.
Dennis Poisson, 51, of Macomb Township, Mich., has a simpler plan in mind. While Poisson, a manager for General Motors in its design division, is eligible for a traditional pension, he says he and wife, Danielle, want to play it safe. Once they retire, in about a decade or so, their intent is to sell their 3,000-plus-square-foot home and downsize to a 1,500 square-foot condominium. "That's our insurance policy that we'll be able to travel and do all the things we like to do," he says.
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