The Challenge of Preparing for Retirement
T. Rowe Price Associates, Inc.
Planning for retirement, usually a major financial
concern for those over age 40, has become even more prevalent now
that the huge postwar baby boom generation is moving through middle
age.
Various surveys indicate that preparing for retirement already ranks
as America's primary financial goal. T. Rowe Price's own survey of
mutual fund shareholders showed that 40% ranked retirement planning
as their most important financial objective, and two-thirds
considered it "very important."
The studies reveal that Americans not only look forward to
retirement, but many also expect to retire early. In addition,
retirees are apt to live longer as improvements in health care
extend life expectancy. People retiring at age 60 today are expected
to live another 25 years, or more than half again the length of
their working careers. This makes the challenge of accumulating
enough money for retirement even more difficult, since these savings
may have to last longer and there will be less time to earn them.
While it's clear that retirement planning has become a leading
financial goal, the big question is whether people will be
financially prepared to retire when they want to. |
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What It Takes |
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Pension and Social Security benefits will
not be adequate for people who expect to
maintain their standard of living after
retiring. While some expenses are generally
lower in retirement, financial planners and
government officials estimate that
individuals need 60% to 80% of preretirement
income to maintain current living standards
in retirement. However, the appropriate
amount can vary widely depending on personal
circumstances.
The combination of pension and Social
Security may replace only about 60% of
preretirement income, so the balance must
come from personal savings, supplemented
perhaps by part-time work. Further, the
higher your annual earnings, the smaller the
proportion that Social Security generally
replaces, making your other sources of
income all the more important.
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The Baby Boomers |
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While personal savings are a key
component of just about anyone's retirement
plan, they may be particularly important for
the baby boom generation, which begins
reaching retirement age in the year 2012.
Social Security will contribute
proportionately less of this group's
retirement income.
Starting in the year 2000, the age at which
full benefits are payable was raised for
anyone born after 1937. For those born in
1960 or later, the retirement age to
receive full benefits is now 67. Benefits
are still available at age 62, but they are
permanently reduced by 30%, compared with a
20% cut for those retirees born in 1937 or
earlier.
Even with these scheduled changes, there is
concern as to whether Social Security will
be able to provide baby boomers with the
full benefits due them. Today there are just
over three workers paying taxes for every
retiree receiving benefits. Within 40 years,
there will be only two workers per
beneficiary.
The trend in company retirement plans is
also placing more responsibility for
retirement planning on the individual. In
recent years, companies have increasingly
shifted from defined benefit pension
plans, which guarantee workers a
predetermined retirement income, to defined
contribution plans, where the employer
may match the employee's contributions to a
tax-sheltered retirement plan. The plan's
benefits will depend on how much the
employee contributes and how successfully he
or she invests the money in the plan.
Individuals who change jobs frequently may
be eligible for substantially less in
corporate retirement benefits than those who
have extended careers with one or two firms.
A key reason many of today's retirees are
doing well is because of long careers with
one employer.
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Impact of Inflation
on Purchasing Power of $1,000 |
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| Average
Annual Rate of Inflation |
| 5 |
$863 |
$822 |
$784 |
| 10 |
744 |
676 |
614 |
| 15 |
642 |
555 |
481 |
| 20 |
554 |
456 |
377 |
| 25 |
478 |
375 |
295 |
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The Importance of
Planning Ahead |
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The bottom line
is that you can't rely entirely on the
government and your employer to finance your
retirement program. A significant portion of
your retirement income will come from
savings and investments. You can improve the
chances of reaching your retirement goal by
starting a plan early and sticking with it.
The earlier you begin saving for retirement,
the less burdensome the task, because your
money will have longer to work for you.
To accumulate a $200,000 nest egg, for
example, a person 20 years from retirement
would need to invest about $3,900 annually,
assuming an 8% annual return (compounded
monthly) in a tax-sheltered account. If the
individual were only 10 years from
retirement, however, an annual investment of
about $12,500 would be needed—an
unrealistic target for most of us.
Another reason for starting early is that
you will be better prepared to cope with one
of the greatest threats to
retirees—inflation. Once you retire, your
income must continue growing to keep pace
with inflation; otherwise, your purchasing
power and your standard of living will
decline.
Even at a 3% inflation rate, a dollar is
worth only $0.55 after 20 years. An
individual would need an income of more than
$36,000 in 20 years, for example, to have
the same purchasing power that $20,000 has
today. Social Security benefits are
currently indexed to inflation, but most
pension plans are not. As a result, your
savings would have to offset the potential
loss in purchasing power of a fixed pension. |
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While preparing for
retirement is a formidable task, it can be
accomplished successfully with considerable planning
and discipline. T. Rowe Price's resources may be
helpful, whether you're devising a retirement
strategy for the first time or just checking to see
if you're on the right track. They offer a free
Retirement Planning Kit, and their web site has
extensive information about investing for
retirement, including an interactive Retirement
Income Calculator.
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| Charts in this
report are for illustrative purposes only and are
not intended to represent the performance of any
specific security. |
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Price Associates, Inc. or other mutual fund companies, visit Fund
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