Saving for Retirement
A Catch-Up Guide to Retirement
Even if you got a late start, you can still build a sizable nest egg during your final decade of work.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
May 25, 2010
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Late bloomers, take heart: There is still time to build a respectable nest egg for retirement. And if you're really disciplined, you could amass nearly half a million dollars during your final decade of work. It may not be easy, but it is possible.
A majority of Americans say that they are behind in saving for retirement, according to a new survey by TD Ameritrade. When asked why they were concerned about the size of their retirement savings, more than half of the respondents said they had little money left to save after meeting regular expenses. And a majority added that they got a late start.
The key to making up for lost time is to reverse your priorities. Rather than waiting until the end of the month to shift money toward savings, put your savings goal first and adjust your budget to what's left over. The old adage of "pay yourself first" is easy to apply when you have access to an employer-based retirement-savings plan, such as a 401(k). The money goes directly from your paycheck to your retirement-savings account before you have time to spend it.
Money contributed to a 401(k) or similar retirement plan is not taxed. Say you make $50,000 a year and contribute 10% of your salary -- $5,000 -- to your 401(k) plan. You benefit in two and possibly three ways:
--You're taxed on only $45,000, which saves you $1,250 in tax if you're in the 25% federal income-tax bracket.
--Your $5,000 contribution grows tax-free until you withdraw it.
--Any amount that your company puts in as a match is pure gravy. If your employer adds 50 cents for every dollar you put in, that's an immediate 50% return on your investment.
Starting from scratch
Let's assume you're 55 years old and you've saved zilch so far for retirement. Don't despair. You don't have to be a Wal-Mart greeter well into your eighties to keep food on the table. Here's an example from T. Rowe Price that shows it's never too late to save for retirement: Say you earn $80,000 a year and your company offers a 3% match in your 401(k) on the first 6% of pay. If you contribute just enough to your plan to capture your employer's match -- 6% -- you could accumulate nearly $150,000 by age 65 (assuming your investments grow by 8% annually and your salary grows by 3% a year, which would raise the dollar amount of your contribution and your employer match).
Dramatic results
If you really want to build a big retirement stash and you're very disciplined, you'll be amazed at how much you can squirrel away during your final decade on the job.
For example, if you contributed $16,500 a year (the current maximum limit for retirement-plan contributions) for each of the next ten years, your savings could grow to nearly $350,000, assuming the same employer matching contributions and investment earnings. And if you took advantage of catch-up contribution limits for workers 50 and older and saved the maximum $22,000 a year for each of the next ten years (which would represent a whopping 28% of salary in the first year), you could accumulate nearly $450,000 by the time you were 65.
"Saving that much may be very difficult for many people," acknowledges Christine Fahlund, senior financial planner for T. Rowe Price. "But the potential results -- as much as half a million dollars built up in retirement savings over a decade -- are significant enough that it may be worth making such a strong commitment to saving," she says.
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Reader Comments (38)
POSTED BY: kit64 (05/27/2010 12:18:49 PM)
This scenario assumes your investments grow 8% annually. Yeah right.
POSTED BY: hs (05/27/2010 01:10:26 PM)
Not really sure this is a catch up guide, per se. There is no magic involved here. Although the mention it, they don't really stress two key issues. First, the magic of compounding is your best friend. That means saving a little bit regularly (regularly - very important) starting as early as you can so it grows over the longest period of time is your best chance at growing a nest egg. Face it, saving a little bit has got to be easier for most folks. Second, trying to catch up. They mention it, but how realistic is it for someone who hasn't saved a penny until they are 55 to start socking away 16,500/year into a 401k? Think about the guy in their example is making $80,000/year and hasn't saved a penny, He's probably used to a certain lifestyle that he's lead for over 30 years. How easy is it for min to take a $16,000/year pay cut (although it won't be quite that big with the tax break, but still). Anyway, my point is that this "catch up guide" isn't any magic. Either you save, you start saving, or you don't. The more you save, the more you have. There isn't a whole lot more to tell.
POSTED BY: bookdiva (05/27/2010 02:15:38 PM)
This is, of course, assuming that you now have a job and that job provides benefits.
POSTED BY: Rohit (05/27/2010 02:42:04 PM)
"Assuming your Investments grow at 8% a year" - that's a pretty optimistic assumption given the world we live in today - debt laden consumers and governments struggling to not default on their obligations. We cannot just assume that historical returns will hold in the "new normal" world.
POSTED BY: cohen (05/27/2010 03:02:32 PM)
Great plan until the market crashes and 40% of your retirement savings vanish.
POSTED BY: blinky64 (05/27/2010 05:19:24 PM)
Where are you going to find an 8% return? Hello?
POSTED BY: Joe S (05/27/2010 06:54:34 PM)
The difficulty may not be in saving that amount each year, its getting the 8 percent growth each and every year!
POSTED BY: Bob (05/27/2010 07:18:17 PM)
"...assuming your investments grow by 8% annually and your salary grows by 3% a year.." Good luck with that. However, if you start by age 50, the house is paid off, and the kids are out of college, you could salt away a tidy sum in fairly short order. The really hard part is not the saving. It's cutting the unnecessary spending.
POSTED BY: dolphin (05/27/2010 10:21:46 PM)
What pisses me off no end is that all the so-called "advice" for saving for retirement assumes that we all work for companies that offer 401K's!! Most business are small businesses and the DO NOT offer that luxury. What about the rest of us?
POSTED BY: Mike (05/27/2010 10:53:35 PM)
$80 000 a year?? How many people make that kind of money? 3% company match? My company stop matching long time ago. Investment that grows annually 8%? In what country is that? You guys talk nonsense. Maybe this apply 20 years ago, but not today. My 401k is half that what used to be 5 years ago, and I bet that everyone is in the sane boat
POSTED BY: david (05/28/2010 03:03:58 AM)
Nice examples above. Now, say you earn $14,500 and your company offers NO 401(k)...what then?
POSTED BY: Mary Beth Franklin (05/28/2010 11:54:07 AM)
Hi all, I'm glad this article is generating so many comments. I didn't say it would be easy to amass such a large nest with such a late start. I'm just saying it's possible. And no, everyone doesn't have access to a 401(k), but everyone who has a job can contribute up to $5,000 to an IRA ($6,000 if you're 50 or older). If you own your own business, you can set up a solo 401(k) or a SEP-IRA and contribute substantially more. And, yes, while we've seen virtually flat market returns from the S&P 500 index, which tracks large company stocks, over the last decades, other market sectors, such as emerging markets, posted enormous returns. See the recent column from our in-house economist Richard DeKaser why 8% is a reasonable assumption -- http://www.kiplinger.com/columns/dekaser-practical-economics/archives/stocks-why-investors-can-still-expect-8-percent-long-term.html. Starting to save early is always better, but this shows it's never too late.
POSTED BY: dolphin (05/28/2010 08:09:11 PM)
Mary Beth, please consider writing an article for those of us who work for companies that do not offer 401K's. We need to save for retirement too. It would be widely appreciated, I think.
POSTED BY: D. Gartner (05/29/2010 07:11:02 AM)
I get 8% on my money. Check out David Lerner Associate's Apple REIT IX.
POSTED BY: Bob Smith (05/30/2010 03:49:29 AM)
The primary flaw in the thinking that went into this article is this: The 8% return presumes an asset allocation of 100% stocks (note the author's comment which links to an article that predicts an 8% return in stocks over the next decade). The author sets up a scenario where someone who has never invested before would assume a 100% stock allocation. That is simply FAR too much risk for a novice investor who is only 10 years from retirement. Unfortunately, at present cash is yielding roughly 1% and intermediate-term bonds are yielding 2%-3%. Therefore, no portfolio with a reasonably sensible allocation can be expected to generate 8%. In the real world, a worker with no financial assets and a 10 year retirement horizon is in a pretty grim situation, and there's really no way to fix it. A bad situation can be made better, certainly, but it's still going to be pretty grim, barring some incredible stroke of luck. There's really no way to spin it positively. This article is flawed. I expected more from Kiplinger.
POSTED BY: AL (05/31/2010 11:16:35 AM)
Why can't seniors invest non earned income in ira's?
POSTED BY: Nette32211 (05/31/2010 10:29:57 PM)
Hello Mary Beth, Like the rest of the group I would like my time back from reading this article. I get tired of seeing the same worthless recommendations for retirement planning. I would like to see more realistic numbers used and suggestions made. An 8% ROI is not reasonable, regardless of what those "experts" says. Most companies are not matching 401Ks any longer. Finally, some of us have begun saving but know it is just not enough. I really get tired of seeing this round peg for the round hole approach. In a perfect world, back in the 80s maybe, this worked. Not today!! Try something more realistic, like a modest-sized nest eggs or provide a good calculator that can help me project my progress based on real interest rates being experienced. Banks are only paying 1-2%. Use those numbers.
POSTED BY: Nette32211 (05/31/2010 10:30:41 PM)
And i forgot to add that most of us are making less than $50,000 per year.
POSTED BY: John (06/01/2010 08:54:59 AM)
I agree. This article paints a very rosy picture of investing. Realistically, you would be lucky if you got 3% per year growth in your retirement savings. For the past decade most people have had zero growth in their retirement accounts and some have even achieved negative growth i.e. they lost money. It's not just Kiplinger and Morningstar that are guilty of this. I have received the same pitch from Charles Schwab, Fidelity, T. Rowe Price, Prudential, Franklin Templeton...etc. Of course it is nonsense no one really makes those kinds of returns unless you have deep pockets like Warren Buffet. He can negotiate the terms of his investments that are suitable to him. The rest of us just have to take in the rear and thank them for it. Lately, I have been thinking that the best retirement savings plan is a simple FDIC insured certificate of deposit. It may not earn much interest now but at least the principal is safe and moreover, I expect interest rates will go back up in the next year or two.
POSTED BY: Roadrunner (06/01/2010 02:01:57 PM)
This article is a blue print from the pre Wall Street collapse and should be updated to reflect todays realities. It is a recipe for disaster. I been in the stock market for 20 years and have seen three bubble bursts.
POSTED BY: notquiteold (06/01/2010 11:07:52 PM)
Several of my mutual funds returned more than 50% last year. 8% is not unreasonable over 10 years. I do disagree with 100% stock allocation but it served to demonstrate that dramatic gains could be had. I took the article as what it was: a how-to for a person that suddenly freaks out because they haven't saved enuf. Sure, other options would have been nice. I had hoped to see some ideas for my recently-disabled, suddenly retired friend. What can he do between 50 and 60 when he's not working and is out of tax shelters? I don't think the author should be pounded, tho. The focus was narrow, but for those in the target audience, the info was good.
POSTED BY: Tom (06/02/2010 12:28:21 AM)
How about some real advice??? If you are 55 and haven't saved anything for retirement, I hope you like the taste of cat food.
POSTED BY: Vic (06/02/2010 08:56:22 AM)
Most of the posts take issue with the 8% assumed annual return. I've seen similar articles that are assuming 10-12% returns. Most investors know that these assumptions are pure fiction. The financial press and financial products industry are in bed together to get your investment dollars. They get the profits, but you take all the risk. You do need to save for your own retirement. So keep costs low, stay safe but avoid hype like this.
POSTED BY: Vince (06/02/2010 09:44:59 AM)
This article really angered me (which doesnt happen often at all). Ive been squirreling away money since I graduated from college 13 years ago (401k matching, money in savings every month). I also happen to have a great job that pays much more than what is stated here. The 8 percent return is ridiculous; two bubbles later my 401K has been crushed ($150,000 in 10 years please). I have my 401K pumped to 9% with company match and Ive not hit this number yet. This article assumes a perfect scenario, in a perfect market. Lets see an article that lays out a real scenario, bubbles that nail 50% of your 401K, higher taxes, inflation and last I checked, raises, bonuses and promotions arent real popular these days. Lets help people plan for the real future. Yes, be smart, save your money, but don't bet on the numbers provided here.
POSTED BY: SteveTheHawk (06/02/2010 10:16:30 PM)
It's true that the article does focus on 401K plans, which are not available to everyone. In the absence of a 401K, there is always a traditional IRA and/or a Roth IRA. The former is receives tax deferral on contributions and the latter is tax free on withdrawal (after age 59 1/2). I agree that 8% is also a bit much to hope for, but even 4% should be reason enough for saving where possible.
POSTED BY: Jennifer (06/29/2010 09:36:16 PM)
This is a lovely article except for a couple of issues. MOST people who need to save for retirement make under 20,000 a year. There is no 401K, no retirement plans and in most cases NO health insurance. Since the cost of living (i.e.: rent, car payment, lights, food etc) is based on your lovely 80,000 a year and 401K... please explain how we are supposed to save anything?
POSTED BY: trevm69 (06/30/2010 08:30:56 PM)
I want the same koolade you and your "in house economist" are drinking. My wealth manager at Bear Stearns chuckled when I wanted 8% returns.....and look what happen to his company.
POSTED BY: Angela (07/01/2010 06:12:16 PM)
Thank you for your article, I plan to open a SEP-IRA on Tuesday. Thanks again.
POSTED BY: Angela (07/01/2010 06:18:34 PM)
Not in the age bracket yet and have savings, but your article nudged me to review my spending habits; I plan to save even more now! Thx again and I will pay it forward!
POSTED BY: diana (07/02/2010 07:42:08 AM)
There are many employers that are offering 0 to 1% match to the 401(k) plans and 1 to 2% wage increases. Investments are not growing 8% annually. It would be very helpful to see plans for these rates as they are more realistic for our world today. I know these articles are written to motivate us into retirement investing but be realistic.
POSTED BY: Steve (07/02/2010 12:07:00 PM)
I would add one more way to the three already mentioned in which people who contribute to a retirement plan benefit. If you make $50000 and contribute 10%, assuming you continue to live within your means, you have just learned to live on $45000. Once retired, you also no longer contribute to SS, so you should be able to live on $42,000.
POSTED BY: linda (07/13/2010 02:47:10 AM)
Actually, when you retire you aren't going to need the large income you have now to maintain a family, a big house and all the associated expenses that go along with a full-time job. You can probably live on half of your current income. Most people aren't going to spend all of their retirement traveling constantly on luxury trips or dining everyday in fancy restaurants or lounging around golf communities. Simplify and slow down and retirement will be within reach.
POSTED BY: cacci52 (07/16/2010 02:54:45 PM)
Not only are they optimistic with 8% growth, but they assume a company match (lol) and that you will receive an annual pay increase of 3% (lol)--maybe they should consider, pay cuts, furloughs and job losses! I am lucky to still have a job but we experience furloughs, pay cuts and there is no match right now. . .
Posted by: Noworries at 07/24/2010 06:22:31 PM
I think you would be better off taking that $16500 and taking lavish vacations that you can enjoy while you're still young, and just plan on working till you die. Beats doing without for the rest of your working life only to find out you have to sit in the dark and eat cat food.