Stay Calm when Planning Your Retirement

Physician's Money Digest, December15 2004, Volume 11, Issue 23

A recent study by Hewitt Associates indicatesthat most Americans may need towork longer and save more for retirement.The study results echo the long-held beliefthat baby boomers spend money wastefully and arenot very good at saving.

Operating on the premise that workers need tohave enough in total retirement resources to providean annual income equal to roughly 75% to 80% oftheir preretirement income, the study reveals thatmany Americans will come up short.

For example, the study found that employees whoparticipate in a 401(k) plan but do not have an employer-sponsored pension plan are likely to replace only80% of their preretirement income. Perhaps even moreimportant is that when 401(k) plans are offered, morethan 30% of eligible employees do not participate.

Making More Money

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Based on that information, many preretirees mightbe tempted to hit the panic button. But a recent articlein suggests that for most Americans,there probably is no need to panic. As Meir Statman,a finance professor at Santa Clara University, pointsout, "There is no need to live in fear that you aregoing to be penniless in retirement."

The article indicates that most boomers todayearn more real income and have accumulated morereal wealth than their parents did at a comparableage. In addition, boomers are saving at approximatelythe same rate as their parents. That suggeststhat they will have more money to tap when it comestime for them to retire.

In support of that argument, the article pointsout that, in recent years, employee nest eggs performedbetter than the stock market. According tothe Employee Benefit Research Institute/InvestmentCompany Institute 401(k) database, from year-end1999 to year-end 2002, the database's 15.5 millionactive 401(k) participants in their 50s saw the valueof their plans drop by 15%. In comparison, theStandard & Poor's 500 stock index declined 38%over the same time period.

Choosing to Work

Despite the relatively secure situation that manyAmericans find themselves in, there are those that,either due to poor investing decisions or just plainbad luck, are on less than stable ground when itcomes to retirement preparedness. As a result, manyboomers (ie, 25%) say they plan to continue workingpart-time in retirement.

Interestingly, they're not alone in their willingness,even desire, to work. A baby boomer retirement surveyby AARP found that 80% of respondents expectto be gainfully employed—30% of whom plan towork part-time simply for interest or enjoyment. Anadditional 15% indicated that they plan to start theirown business. Clearly, for many boomers, work is nota nasty four-letter word.

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The good news, according to the article, is that employers are expected to welcomethese ambitious retirees. Educational Testing Servicepredicts a skilled labor shortage of approximately 5million in 2010, and 14 million by 2020. With muchof the population better educated and healthier thanprevious generations, retired boomers could findthemselves in high demand.

The bottom line for many preretirees is knowingwhether they're currently putting enough into theirretirement savings. That can be a difficult question toanswer, because there is no magic number that signalsyour arrival at financial security.

The best thing to do, the article notes, is to startfinding out what kind of life you want to lead duringretirement. Do you want to continue working? Doyou plan on extensive travel, or are you content torelax within your community?

In most cases, you're likely to find that your visionof a happy retirement is simply a variation of the lifeyou've already lived.