To retire comfortably, under-40 workers need to seriously bulk up savings

By Jonathan Kern
Special to The Washington Post
Sunday, July 18, 2010

If your junior-high soundtrack was more Bangles or Britney than Beatles, I am going to try to scare some sense into you with three words about life in retirement, based on personal experience: The paychecks stop.

I retired last year after 30 years as a broadcast journalist. Unlike most baby boomers who have retired, I do not receive a pension. This surprises and appalls my fellow early retirees, who are either enjoying income from a spouse who's still working or receiving checks from old employers.

If you're, say, under 40 -- and especially if you're under 30 -- you probably have worked only at firms or agencies that offered 401(k)s or their nonprofit cousin, the 403(b). That means that when you finally do retire 25 or 35 years from now, you will be responsible for providing for your own income. No pension for you!

Much has been written telling you how to prepare for that day -- namely, to save every cent you can.

A recent study shows that most people ignore that advice. In the wake of the recession, the Employment Benefit and Research Institute found that, among other things, fewer workers are saving for retirement, a quarter of those surveyed have nearly no savings (i.e., less than $1,000), most workers don't know how much they'll need to retire and more than half say their total savings is less than $25,000.

Clearly, all those thoughtful lectures about the need to prepare are falling on deaf ears.

So I'll say it again: The paychecks stop. Every day, every week and every month of your retirement, you'll use up some of the money you accumulated while you were working.

Specifically, imagine that every week you have to pay for food with cash from savings. And it's the same with your electricity, cable, phone, gas, credit card and other recurring bills. Because your health care is no longer subsidized by your employer, you write a big check each month to an insurance company as well. If you earn a few bucks on the side, even the taxes have to come out of your savings; no one else withholds federal and state tax from every paycheck.

Sure, if you work until you can collect Social Security, you'll get some money from the government, but it's a fair bet that your No. 1 source for retirement is going to be you. If you are not saving assiduously now, you are going to be much, much poorer in retirement. Restaurants, cable TV, BlackBerry service, travel abroad -- even things like beer, fast food and haircuts -- all will be fond memories of youth.

Retirement does not have to be this way.

I glimpsed my own future more than 20 years ago, when my wife and I worked for the federal government. In 1987, it introduced the Thrift Savings Plan -- basically a 401(k) for government employees. When we left government service, we withdrew our contributions and invested the money ourselves. My next employer offered no pension, only a 403(b).

In other words, although we are both baby boomers -- born in 1946 and 1953, respectively -- we are living the Gen X or Gen Y retirement.

Over the past year, I have learned a few things about how to retire successfully without a pension.

First, take a moment to think about how much money you will need each year after you stop working. Start by itemizing your usual expenses. Estimate your rent or your mortgage and property tax. Make reasonable assumptions about what you spend on food, utilities, essential travel, clothing, car repairs and so on. I assumed that my single biggest expense would be health insurance and budgeted more than $10,000 a year.

Whatever figure you come up with -- let's say, $50,000 -- consider it a minimum. Divide it by 26 to come up with your biweekly retirement income -- about $1,925. Your figure will probably be much less than the usual 80 percent of your current income that most financial advisers say you'll need. We're talking about getting by; any extra will only make life better.

So without a pension, how much do you need to get $50,000 (before inflation) each year? Simply put: a bundle. If you plan to retire at 65 and hope to have at least 30 years in retirement, you'll probably need something like $1.5 million in today's dollars. Even a little inflation could push that to $3 million if you're two or three decades from retirement. For the moment, let's leave inflation out of the calculation.

In other words, if you have saved just $25,000 -- and remember, that describes about half of all workers -- you are less than 2 percent of the way toward your goal. Your future definitely doesn't include cable.

Here's more bad news: Just saving a lot isn't going to be enough. Let's say you're 30 years from retiring, you earn $100,000 now and you guess that your income will go up by about 3 percent a year. Even if you earmark 10 percent of every paycheck for your retirement and your employer adds another 5 percent, you'll have set aside only about $713,000 by the time you stop working. That's half of what you'll need for that $50,000 annual income.

To live comfortably in retirement, whatever you save has to grow -- and its growth has to beat inflation by at least a percent or two. Here's where time is your ally. Take the example above, where you're earning $100,000 a year: That first $10,000 you set aside in 2010 will have become more than $30,000 in 2040 if it grows by 4 percent each year. If it grows by 6 percent, you'll have more than $50,000. And whatever your employer put in will have tripled or quintupled as well.

The bottom line is that the only way to ensure that decades from now you will have enough money to live on is to invest wisely.

So it's imperative to educate yourself. You should understand what a bond is, how to select a mutual fund, how inflation affects your investments and so on. Even if you turn to a financial planner, you'll need to evaluate the advice and make your own decisions about where to put your money. Bernie Madoff's clients wouldn't have been so easy to scam if they'd understood that it's simply impossible to get 12 percent returns, year after year, in vastly different economic climates.

That's a key point: Economic conditions change, and you will need to take advantage of those changes. If the next 30 years are even remotely like the past 30, inflation will swing from low to high and back. There will be stock market booms and crashes. As an investor, I've endured the crash of 1987, the bursting of the tech bubble in 2000 and the terrible bear market of 2008-09. I've also seen 13 percent annual inflation, which gave us 16 percent mortgages but also money markets with yields of 15 to 20 percent.

So do a little research about when it's smart to buy bonds -- and whether they should be Treasuries, corporate bonds or municipals -- and when it's better to invest in stocks, bank certificates of deposit or commodities. Learn how to recognize when investments overseas are strong. Over 20 or 30 years, you'll want to diversify and rebalance your investments so that the inevitable market tsunamis create relatively small waves in your portfolio. You're surrounded by this information. Read books about how the markets work, go to Web sites with primers on stocks and bonds or just watch business channels on TV.

Finally, even when times are tough -- especially when times are tough -- don't ignore that quarterly 401(k) statement. That's when you can see whether all your planning is working -- cushioning the blow of a bad stock, bond or real estate market -- or whether you need to explore different investments.

Think of all these do's and don'ts as a warning from your (not-so-distant) future. You can't just cross your fingers and hope that things turn out, or that someone else will take care of it. Start thinking about retirement now. Your life -- or at least your future standard of living -- depends on it.