Boomers are running out of time, and excuses, to save

PERSONAL FINANCE

January 11, 2004|By Eileen Ambrose

BABY BOOMERS have plenty of excuses - some of them even good - for getting a late start on saving for retirement: The purchase of a house. Marriage, children, divorce, remarriage, children. Skyrocketing college tuition.

But time is running out for excuses, despite the AARP's recent proclamation that "Sixty is the new thirty." The oldest boomer will turn 58 this year; the youngest, 40.

Millions of boomers are marching toward retirement. Many are ill-prepared.

Economists once predicted the typical worker would accrue $350,000 by retirement if he saved 6 percent of his salary each year in a 401(k) and received an employer match of 3 percent, said Alicia Munnell, director of the Center for Retirement Research at Boston University. Actually, people aged 55 to 64 in 2001 had an average of $55,000 in 401(k)s and individual retirement accounts combined, Munnell said.

FOR THE RECORD - A business column Sunday misidentified the location of the Center for Retirement Research. It is at Boston College, not Boston University.

That's hardly enough to fund a retirement that could last decades. Some boomers have been diligent savers. Yet even some of them might discover their nest egg lacking for a variety of reasons, experts said.

Boomers will live longer than previous generations. Health care costs are expected to continue to rise. Employers are reneging on pension and benefits promises. The new Medicare law, critics predict, will cause some companies to drop more generous medical coverage for their retirees.

And remember the $10 trillion that boomers were supposed to inherit? It's not going to happen, according to a recent AARP study. Boomers' parents also are living longer and dealing with their own growing health costs, which means less money for inheritances.

"Many are waking up to the fact that their savings aren't going to provide for them in the future," said Thornton Parker, author of What if Boomers Can't Retire?

If 2004 is a turning point for getting serious about saving for retirement, here are suggestions:

Calculate retirement needs. Figure out how much you'll need to save based on future expenses, how much you already have saved, and expected income from pensions and Social Security. There are plenty of online retirement calculators to help with these projections.

Each has its own bias built in, so try two or three calculators to get a well-rounded picture, said Olivia Mitchell, director of the Pension and Research Council at the Wharton School of the University of Pennsylvania.

An important, but tricky, figure in the equation is how many years you'll be retired. Many boomers, especially women, can expect to live well into their 90s or hit 100, experts said.

Indeed, boomers might not be able to afford to retire in their early 60s, as most of today's retirees did, experts said.

Think smaller. Many workers expect they can safely withdraw 8 percent annually from their investment portfolio in retirement. But if boomers don't want to outlive their money, their initial withdrawal should be 4 percent, said Christine Fahlund, senior financial planner with T. Rowe Price Associates in Baltimore. Thereafter, the dollar amount of withdrawals can be increased 3 percent each year to keep up with inflation, she said.

Don't overlook health care. Boomers can expect that health care costs will rise, and that some of them will need long-term care, both of which can rapidly deplete a nest egg, said Don Blandin, president of the American Savings Education Council. Older boomers might want to consider buying a long-term care insurance policy, he said.

Also, keep future medical costs down by living a healthier lifestyle now, Blandin said.

Boost savings. Start with your 401(k) plan or similar workplace retirement plan, experts said. Contribution limits this year go up by $1,000 to $13,000 in a 401(k). Those 50 and older can make an extra $3,000 contribution for a total of $16,000.

These limits continue to rise though 2006, when younger workers will be able to contribute up to $15,000 a year, and those 50 and older will be able to put away up to $20,000.

Once you max out on your 401(k), consider a Roth IRA if you're eligible, said Fran Kinniry, a principal with the Vanguard Group in Malvern, Pa. Money goes in after taxes have been paid, but withdrawals are tax-free in retirement.

Workers can contribute up to $3,000 this year, and those 50 and older can put in an extra $500.

With the recent reduction of long-term capital gains, consider putting any extra dollars in a tax-managed or index mutual fund, both of which minimize the amount of capital gains recognized each year, Kinniry said.

Keep balanced. Near-retirees a few years ago ended up postponing retirement because they got burned in the stock market, particularly by being too heavily invested in a single sector or in a company whose fortunes went south. Make sure you have a diversified portfolio that's not too risky for your investing timetable, experts said.

"We were all burned once," Munnell said. "There is no excuse to being burned again."

Trim expenses. Does it seem you don't have extra dollars to sock away? Take a detailed accounting of what your expenses are for about a month to find out where your money goes, Mitchell said.

You'll likely find where you can cut costs without much pain, experts said. "We're not talking about hard tradeoffs. Instead of three times a month going out to dinner, maybe cut it back to two times a month," Fahlund said.

Reduce debt. "The big thing about credit-card debt is the interest winds up chewing up a lot of your cash," said Parker. That's money that could have gone to save for retirement or make purchases in the future, he said.

Fahlund also recommends paying off a mortgage before you retire by putting extra dollars now toward the principal. Not having to make mortgage payments in retirement can increase your monthly cash flow substantially, she said.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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