How to save more for retirement?

The Social Security privatization debate may be headed for a close and the Bush administration is probably looking for an exit strategy, but there was a positive side to it. It created tremendous awareness about retirement planning. Here are some tips on how to be better prepared for retirement.

1. Save more. The United States ranks last among industrial nations in our savings rate. The federal government is running a large deficit and, like their Uncle Sam, individual Americans prefer to consume now, rather than save now and spend later. In addition, most employers do not offer defined benefit pensions any more. The truth is we need to save more as a nation. And you have to save for your retirement. Someone else is not going to provide for your future. (Related article: Poor saving habits hurt Americans)
2. Live within your means, create a budget and stick to it. When analyzing the solvency of the Social Security system, actuaries and economists assume certain growth rates in the economy and in benefits. A small difference in assumptions can make a great difference in the conclusions. For example, if the economy grows by 3% rather than 1.5%, there is a tremendous difference in whether there will be enough money to pay the bills. The reason for this is the power of compounding over decades. Use this knowledge to make your own projections and to alter your spending and saving choices. If you need assistance with such things as goal setting and investment choices, seek professional help from an independent fee-only financial advisor. (Related article: Americans concerned about retirement but do nothing to fix the situation)
3. Plan ahead so that your money lasts as long as you do. Since 1940, life expectancy for those attaining age 65 has slowly and steadily increased. The number of Americans Age 65 or older has increased from 9 million in 1940 to almost 35 million in 2000. The sheer size of the "Baby Boom" generation will cause those numbers to balloon. You may live into your 90’s, which is why many financial planners use age 95 in a retirement needs analysis.
4. To avoid a pinch in your lifestyle, start early. Because we are talking about a system that will be in effect far into the future, the sooner we tackle the Social Security problem the better. The same holds true for individual savers. If you are in your 30’s and want to plan for a comfortable retirement, you may need to save only 10% of your yearly earnings. If you wait until you are 45, you may have to save 20% of your salary. Waiting until you’re in your 50’s may mean that you’ll need to save half of all you earn. (Related article: Retirement planning tips if you are under 30)
5. Create a long-term investment plan and stick to it. The discussion of Social Security’s health in 75 years reminds us that we need to focus on long-term goals and results. Studies show that individual investors suffer when they react to short-term fads and chase last year’s market performance. On the other hand, history proves that planning and patience pay off. Do your homework, make prudent assumptions and stay the course. (Related article: Personal finance tips for retirement)
6. Learn about stocks, bonds, mutual funds, diversification, risk and return. The investments you choose now are important. Learn the advantages and disadvantages of the funds that are available to you in your employer’s 401(k) or 403(b) plans. Create an overall plan that takes into account retirement and other savings. Should Private Accounts come into being, individuals will have to become much more knowledgeable about investing. Why wait? Improve your financial IQ a little everyday.
7. Take a few calculated risks. The current Social Security fund is "invested" in Treasury Securities (it’s really a system where one part of the government lends money to another part). Treasury Securities are of the highest quality but, over the long term, provide low returns (this is what Private Accounts are meant to remedy). As you study the issue, you will probably decide that the biggest risk is not taking any risk. Many financial planners believe that how you allocate your investments (stocks versus bonds, for example) greatly determines your overall results. Remember that risk and return are linked – the higher the risk, the higher the potential return. Unless you’re already rich, you will not achieve your long-term goals by playing it safe (for instance, only investing in bank CDs).
8. Control investing costs. Some people are skeptical of the proposed Social Security Private Accounts because they fear that management and accounting fees will be too high. Realizing that over decades even a 1% change can make a great difference brings home how important it is to control costs in your existing investments. Costs matter and they can be controlled. When comparing mutual funds, pay attention to sales commissions, hidden transaction costs, high turnover, and operating expenses to arrive at expected rates of return. A fee-only financial planner can give you independent, objective advice. Many favor index funds which provide broad diversification and low annual costs.
9. Max out those retirement plans. How ever the Social Security issues are resolved, remember that even now Social Security benefits do not amount to enough to live comfortably. Originally it was put in place to save the old folks from living in poverty. Most people do aspire to do much better than that. Put the maximum amount in employer-sponsored retirement plans such as 401(k)s and 403(b)s to capture employer matches. Then build up assets in Individual Retirement Accounts, whether traditional or Roth. If you can still afford to invest more, max out those employer-sponsored plans. Finally, if at all possible, build up savings in after-tax accounts.
10. Don’t neglect your health. Medicare is actually a larger funding problem than Social Security. The new drug benefit will cost trillions to fund. Your personal health will greatly influence the quality of your retirement. Remember that the choices you make today will influence your health in old age. Like investing, health matters are worth studying. Most experts recommend simple things like getting more exercise, avoiding smoking and consuming less alcohol. Some emphasize smart food choices such as avoiding sugar and refined carbohydrates. Others recommend eating organic produce and avoiding pesticides. Most doctors recommend taking a good multivitamin, and some go way beyond that in terms of supplements. Take charge of your health and learn about what is right for you.

No matter what happens in the current Social Security debate, remember that Social Security alone is not likely to allow you to maintain your present lifestyle once you retire. Even if Personal Accounts are enacted, the ability to put money aside will be phased in and will be rather limited at first. In addition, anyone investing in Personal Accounts will have reduced traditional Social Security benefits.

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- Based on contribution by Roger Streit, President, Key Financial Solutions