By Bob Oberstein, CPA/PFS
In a recent survey, Fidelity Investments found that 83 percent of American workers said they are not socking enough money away for retirement, a 78 percent increase from last year.
In addition, as the Los Angeles Times pointed out on May 15, 2006, early retirement may creep up on some who are not financially ready to stop working. This has led to a severe pitfall in which people scramble to put away enough funds for retirement in the final years of their job, eschewing the many years of savings that is conventionally required.
What is happening, in effect, is that people are planning for the next phase of their life in a relatively short amount of time. In short, we are witnessing an epidemic in which workers are cramming for their retirement.
We understand the needs of the individual. When we ask you “What do you really want out of life,” rest assured that you will be answered in a way most befitting a person of your high standing. As such, we will give you a detailed approach that will allow you to cultivate your potential.
How can you avoid such cramming and save smartly? Consider 5 common myths:
1. “I have enough for retirement.”
It is not enough to just think you are ready for retirement. Disciplined retirement requires that you factually know how much is in your nest egg so that you do not experience any financial surprises when you are planning that retirement cruise to Mexico. In a study commissioned by the Employee Benefit Research Institute, a quarter of workers participating in the survey said they were very confident about their prospects for financial security in retirement. However, 22 percent in the very confident group said they are not currently saving for retirement and 39 percent said they have less than $50,000 in savings.
2. “Employment is always one of my options.”
“Our research clearly shows that many people...who are betting on simply working longer to compensate for a lack of current savings are setting themselves up for a rude awakening and a significantly poorer standard of living in retirement than they had expected,” says David Hunt, a senior partner at McKinsey & Co., a management consulting firm. The marketplace can be a veritable powder keg of surprise these days, which can lead to explosive results. Instead of relying on an eternal job, pay attention to the writing on the wall and look at your future in realistic terms.
3. “I save money, so I’m prepared.”
The Fidelity survey shows workers are only saving at a pace that would cover 57 percent of their current income in retirement. Saving money for retirement should not be so much a passive exercise in putting away nominal funds each month, as much as it should be a proactive journey to retirement security. To help, postulate a high-end mark for a monthly savings retirement goal. Getting as close as you can each month to that goal will still be well above your average and will ensure that, when the time comes, your preparations will reconcile with your needs.
4. “Nothing bad will happen.”
In 2002, massive flooding ravaged Europe, killing dozens, dispossessing thousands, and causing damage of billions of euros. However, by previously strengthening flood defense systems, Vienna experienced virtually no damage, despite the fact that the Danube River reached record heights. Just as Vienna prepared for the worst, so to does your retirement savings require such attention. Because the future is an unpredictable harbinger of events, it is hard to tell when your own brand of “flooding” will occur. An old Czech proverb says “Do not always expect good to happen, but do not let evil take you by surprise.”
5. “My bills are manageable now, so they will be in retirement too.”
Conventional wisdom holds that you will need to replace 70 to 90 percent of your pre-retirement income. However, your situation might change. Expenses typically decline for retirees: taxes are smaller (though not always) and work-related costs usually disappear. Overall, expenses may not decline much if you still have a home and college debts to pay off. Large medical bills may keep your retirement costs high. In fact, an average couple retiring this year will need at least $200,000 to cover their healthcare costs for 20 years in retirement, not including the expense of long-term care should they need it. The $200,000 cost estimate is a 5.3 percent increase over last year's estimate of $190,000.
For younger people in the early stages of their working life, estimating income needs that may be 30 to 40 years in the future is obviously difficult. At least start with a rough estimate and begin saving something-10 percent of your gross income would be a good start. Then every 2 or 3 years review your retirement plan and adjust your estimate of retirement income needs as your annual earnings grow and your vision of retirement begins to come into focus. Estimate conservatively taking into account key factors, such the ones previously mentioned and how you plan to spend your retirement. Going back to work might not be on the top of your retirement to do list. Save now to avoid future financial calamities.
Like it or not, the day will come when you will retire: either by choice or not. Instead of being a passenger in your own car, take the reins and set your destiny in motion. Know, prepare and be active. It’s the best bet for an easy retirement.
Bob Oberstein is Managing Partner of the financial planning firm OSF Wealth. A designated Personal Financial Specialist (PFS), Bob is licensed by the California Department of Insurance, and is a Registered Investment Advisor. Bob holds membership in both the California Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Additionally, Bob is a member of the Financial Planning Association (FPA).