At Current Savings Rates,
Most People Won't...
The continuing controversy over how best to fund Social
Security and Medicare for the next century has kept
the looming "retirement crisis" on the front page of America's
newspapers. While experts argue back and
forth about just how serious the crisis is, one fact seems clear to all concerned:
today's workers must take
the primary responsibility for funding their own retirements, whether they are 10,
20, or 30 years in the future.
Traditionally, retirement income has been
compared to a "three-legged stool," the legs being Social
Security, pensions, and savings. But with Social Security looking sick, and today's
highly mobile workers -
- especially contractors -- rarely in one place long enough to build up any substantial
pension benefits at a
single place of employment, the primary responsibility for financing a secure
retirement is falling more and
more directly on workers themselves.
This means that personal retirement savings
are now more important than ever. But unfortunately, a recent
study shows that today's employees aren't saving nearly as much as they'll need to
fund safe, secure
retirements in the 21st century.
The Workplace Pulse survey, conducted by
the Washington, D.C.-based Employers' Council on Flexible
Compensation (ECFC), shows that while working families saved one third more toward
1996 than they did two years earlier in 1994, they're still not saving nearly
enough to meet their retirement
Average annual retirement savings rose to
$2,388 during 1996, an increase of 11 percent over 1995
and 34 percent over 1994. Even at this higher rate, the savings of workers in every
age group are
insufficient to meet their retirement income expectations. Expectations for annual
retirement income rose
nearly 8 percent between 1995 and 1996, to $26,256 from $24,372.
Workplace Pulse found that the average
worker aged 25 to 34 saved only $1,761 during 1996, less
than the maximum contribution limit for Individual Retirement Accounts (IRAs). But
according to figures
developed by Colonial Life Insurance Company, which co-sponsors the annual survey
with ECFC, the
average 30-year-old worker needed to save $662 more each month during 1996 than he
or she actually
did to achieve an annual retirement income of just $26,256 in constant dollars
(assuming 4 percent annual
inflation, 11 percent investment interest rate, and life spans based upon actuarial
tables). A 60-year-old
worker with $140,000 already saved toward retirement should have been putting away
$2,325 per month to retire on a $26,256 yearly income.
"There's a huge gap between what
people expect and what they will likely receive," says Colonial Life
Vice President John Penko. "For younger workers, there may still be time
to catch up. For older workers,
it is going to be very difficult if not impossible for them to live their
retirement dreams, even though workers
over 45 are saving 31 percent more than they were two years ago."
The 1996 Workplace Pulse survey shows
dramatic changes in workers' attitudes and behavior toward
retirement savings over the past five years, according to Ken Feltman,
executive director of the Employers'
Council on Flexible Compensation.
"More workers now realize that they
can't depend upon employers or the government. One third of those
surveyed said they'll have to look to themselves to finance their own
retirements, while in 1992 only 18
percent felt that individuals should pay the majority of retirement needs.
"Workers also realize they aren't
saving enough," Feltman observes. "Seventy-one percent of those
surveyed said they were not setting enough aside for retirement compared to 60
percent in 1992. The
sad reality is that they're correct; and for many, time is quickly running
The Workplace Pulse survey also found that:
||Only half of all workers over 45 (51 percent) say that
they have an adequate retirement plan in place. Nearly one in five total workers (19
percent) have given their retirement needs little thought.
||Workers want to have greater choice in making their
retirement plans. Two-thirds (66 percent) said they would like their employers to provide
401(k) plans, preferring these self-directed retirement plans over employer-directed plans
or Social Security.
|| When asked about expectations for
their standard of living in retirement, workers' responses were virtually unchanged from
the 1995 survey. Forty-seven percent said they expected their retired standard of living
to be "about the same" as when working and 6 percent said "much
better," while only 10 percent predicted "much worse." Overall, one-fifth
of those surveyed (20 percent) believed their retired standard of living would be
"better" than while they were working -- an impression not shared by most
The good news is that a whopping 43 percent of those workers surveyed said they had
increased their rate of retirement savings during 1996, compared to the year
The bad news is that it still wasn't enough.
The Workplace Pulse survey reveals a
widening "savings gap" for workers at all ages. Although the
average American worker saved $2,388 per year toward retirement during 1996, the
employees said they should be setting aside $5,850 annually to ensure that their
retirement needs are
met. An annual retirement savings gap of $3,462 exists for the average American
worker. However, as the
accompanying chart shows, the actual gap increases rapidly with the age of the
worker. Or put another
way, while all age groups studied are putting away less than they need to for
retirement, the older working
generation needs to be saving the most -- because it has the least time to make up
The Bottom Line
Feeling smug? Figure the Workplace Pulse
survey results don't apply to you because, as a computer
contractor, youre pulling down a cool $60,000 -- or $90,000 -- rather than
the U.S. average family
income? Then you'd better think again, because the 1996 survey findings do
apply, in a very real sense,
to all workers. How? Look at it this way:
The higher your present working income, the
higher your retirement expectations are probably going to
be. So, if your goal for annual retirement income is, say, $50,000, then you
need to be saving
considerably more each month than the already-high figures quoted above -- almost
certainly a great
deal more than you're saving today.
How much do you need to save? There is no
single right figure, because what happens to your retirement
savings is so inextricably linked to the unpredictable rate of inflation. But the
best short advice is to save,
save, save. Save for retirement as if your life depended on it, because someday in
the next century it
certainly will. At the very least, you ought to be maxing out on contributions to
retirement savings plan available to you in your particular employment
circumstances. IRAs, 401(k) plans,
Keoghs, and SEP-IRAs -- contribute the maximum permitted by law and your
employer(s) to each one,
if you can afford it.
And if you can't, at least do better. Make a very late New Year's
resolution to start saving 50 percent more
toward retirement each month than you have been up to this point. And to
afford this major change in your
savings habits, start looking around for ways to economize on other regular
expenses. Rest assured that if
you're not economizing for your retirement savings now, you certainly will be
after you retire.
We all have one shot at saving for retirement. If we blow it, we don`t get to
go back and do it over again.
Procrastination is the thief of time.
"What are you doing right now to prepare for your retirement?
Remember the best time to start
was 20 years ago... the second best time is today".
Can you roll over a traditional IRA into a Roth IRA?
typical tax fashion, the answer is a qualified "Yes."
Transferring a Traditional IRA to a Roth IRA is also known as a Roth IRA
"conversion." There are 2 requirements for a Roth IRA conversion:
1. Your income must be less than $100,000
2. If you file Married Filing Separate, you and your spouse must not live
together for the entire year.
So qualifying for the conversion isn't that
difficult -- but here's the important point: be aware that the conversion amount is
considered taxable income in the year of the conversion. Depending on the conversion
amount and your tax rate (federal and state), you could end up with a big tax bill.
The trade-off is the long-term tax benefits of the
Roth IRA: assuming you keep the Roth IRA intact for 5 years and you begin withdrawals
after age 59 1/2, then all Roth withdrawals are tax-free. Withdrawals from a Traditional
IRA are not tax-free. This distinction is the main attraction of the Roth.
I advise you to "crunch the numbers"
before doing the conversion; make sure you know the immediate tax consequences before
making a decision.