Retirement Saving: A 40-Year Journey

Some day you'll no longer participate in this event. No alarm clock. No rush hour. And no paycheck. What will you live on in your retirement? That thought tends to pop up more frequently the closer we get to retirement.

"I once read that when you're 20 years old, you hear about investing for your retirement," notes Robin Bechtel, a financial consultant with Financial Network Investment Corp., which provides investment services at First Future Credit Union, San Diego. "In your 30s, you start to think about investing for retirement. In your 40s, you start to worry about it. And in your 50s, you start to hyperventilate."

Sadly, many people can identify with this observation. Because of everything else our money must buy, we tell ourselves we'll save for retirement later--after buying a house, after putting the kids through college. Years go by and we discover there's little "later" left.

But consider this: To save $1 million by age 65, you'd need to invest only $85 a month if you start at age 25 (at a 12% annual return). If you wait until 45 to head toward this goal, you'd have to save $1,000 a month. That amount jumps to roughly $4,300 a month if you delay starting until 55.

See the sidebar to see how different yields will affect the amount you have to save to meet your retirement goals.

So begin saving early and keep at it. Here are a few guidelines about how to approach your retirement investing at various life stages.

Your 20s

In general, women should put at least 12% of their income into retirement saving, and men should set aside at least 10%, according to Bechtel. (Women's typically longer life spans account for the higher percentage.) This is a minimum guideline, she emphasizes, that applies all through your working years.

Take advantage of the retirement plan at work, such as a 401(k), if you have one, or open an individual retirement account (IRA) on your own. That may seem impossible on a slim income. But it may take less out of your pocket than you think.

"The effective cost to you now is the amount you contribute, minus your tax savings," points out Doug English, a certified financial planner at CUNA Mutual Advisory Services, an investment service at South Carolina Federal Credit Union in Charleston.

Suppose you earn $25,000 a year and put 10% into a 401(k). You'll pay no taxes on that 10%, or $2,500. For simplicity's sake, let's say you're in a 20% tax bracket. That means you save $500 in taxes. So you're actually relinquishing $2,000 of your spending money, not $2,500, because $500 would have gone to Uncle Sam anyway. Instead of giving up 10% of your income, you gave up 8%.

Talk to your benefits manager at work to find out how your 401(k) contribution will affect your net income (income after taxes), advises Bechtel. Depending on your tax bracket, "You may find that putting 2% to 4% of your income into a 401(k) has no effect on your net income at all."

Whatever the percentage works out to be in your case, contribute at least that amount to your 401(k). Better yet, Bechtel advises, raise your contribution to at least meet your employer's match. "That's free money," she notes.

As for types of investments, opt for growth when you're in your 20s. Individual circumstances will dictate the precise mix, but many advisers recommend that 85% or more of your portfolio be in stocks or stock mutual funds at this age. You have decades to weather the stock market's swings and come out with a decent overall return.

That advice may be tough to swallow in today's market. Remember, though, "You can look at it as investing in the value of the U.S. economy and our ability to innovate and increase the efficiency of the American worker," English says. "There can be funny business going on with one company. But it's our economy as a whole you're betting on when you invest in a well-diversified group of stocks."

Your 30s

It's easy to get sidetracked from retirement saving during your 30s. People get married, start a family, buy a home, look ahead to their children's college education. You can't let these derail you from saving for retirement.

Another distraction is that people often believe they should pay off their consumer debt, such as credit card balances, before they put money into a retirement fund. For most people, English recommends against that. From strictly a mathematical standpoint, "You can make a case to pay off your debts first and then invest," he says. "But the human nature portion of this says overwhelmingly that you must do both. Because most people don't have the self-control to pay off their debts and then apply that same amount to investing."

So, work on paring down your consumer debt, starting with whatever carries the highest interest rate. But at the same time, set aside at least that 10% or 12% mentioned earlier toward retirement. If you have a 401(k) or other plan at work, build up to your maximum allowable contribution in your 30s.

Your 40s

Usually this is when people feel most pulled between saving for their children's college education and their own retirement. Those who have been saving since their 20s probably can handle both. Those who started later may be faced with choosing. Usually retirement saving loses out.

If you can do only one, opt for retirement saving and let your kids borrow for college, Bechtel advises. "You have to remember that you are responsible for your own retirement," she emphasizes. Later, you may be in a position to help pay off the student loans, which carry low interest rates.

And beyond ...

In your 50s, continue to maximize contributions to your 401(k) or other retirement plan. Begin to position yourself to be debt-free by the time you retire. And shift your investment portfolio toward less risk and more income preservation, so you'll be sure the money is there for you.

Your 60s are a time to seek even greater stability in your portfolio. Still, you'll want a portion of growth investments even after you retire, to cover rising costs of living. One rule of thumb for figuring what that portion should be, at any age, is to subtract your age from 100. That's a guideline that "shouldn't be relied on by anybody," English points out. Too much depends on your individual financial situation.

In fact, over the years you'll need to regularly adjust your portfolio risk to keep pace with your circumstances. Again, the mix that's right for you depends on your goals, risk tolerance, and personal situation. And it keeps changing throughout your life.

"Your adviser should reassess this every year, as far as I'm concerned," Bechtel says. "You may not make changes for 10 years. But it should be evaluated every year."

Published October 7, 2002