Young investors should save now

Your Money

September 03, 2006|By Carolyn Bigda | Carolyn Bigda,Tribune Media Services

Flipping through a fund company's quarterly newsletter, my eyes came to a screeching halt when I read this savings tips for young investors: "Strive to save at least 10 percent to 15 percent of your income for retirement, with any additional savings earmarked for short-term goals such as a car, vacation or house."

The newsletter elaborated, saying you should "save at least 15 percent of your salary each year for retirement as soon as you start working" and stay at that level throughout your career to ensure a comfortable retirement.

You've got to be kidding me, when a young worker (a) likely does not own a home; (b) probably owns minimal furniture; (c) carries about $20,000 in student-loan debt; and (d) may have some credit-card debt.

Judith Ward, a financial planner with T. Rowe Price in Baltimore, which published the newsletter, understood my skepticism.

"It's a lofty number, for sure," she says. "But this generation is going to be so reliant on personal savings for retirement."

You've probably heard all the bad news, but here's a refresher: It's expected that starting in 2040 payroll taxes will fund only 74 percent of promised Social Security benefits. Pension plans are going the way of typewriters and eight-track players. And people are living longer during retirement.

You need to start saving for retirement right away.

The bright side

It may soon become easier to start saving. Last month, President Bush signed the Pension Protection Act, which gives employers the green light to automatically enroll new hires in a 401(k) plan.

And for employees already enrolled, more companies are trying to make investing as effortless as possible: 27 percent offer to rebalance your allocation every year and 17 percent will automatically increase your contribution rate, according to a report from Hewitt Associates.

Finally, don't forget to take into account that any company match you receive on 401(k) contributions counts toward the 15 percent savings target.

The not-so-bright side

No matter how the government or employers tweak 401(k) plans, it's up to you to save enough.

One way to come to grips with the idea is to start calculating estimates for how much you'll need.

Think about what percentage of your salary you'll want to live on in retirement.

In a 2006 survey by the Employee Benefit Research Institute, more than half of current retirees said they live off 70 percent or more of their preretirement income - a figure that most financial planners say to expect.

Carolyn Bigda writes for Tribune Media Services.

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