A few weeks ago, there was a Senate Special Committee on Aging that was taking testimony from number of sources. What the panel found was that people were living longer, that more folks were going into retirement than ever before, and that consumption by such retirees was going up appreciably. However, it also found that people were simply saving much less.
Senator Larry Craig, the panel's chairman, said that the personal saving rate declined by two-thirds in the decade that ended in 2002. What that translates to is a gap between what people need and what they actually have. According to testimony, the gap is a big one: $28 billion to $36 billion a year. This applies to those 65 and older today. It also translates to a gap of $45 billion a year by 2030.
What has also been found is that all the talk about accumulating wealth simply doesn't get the response it should. In fact, fewer people than you think actually have 401(k) accounts and those that do tend to put very little in them.
When the Employee Benefit Research Institute studied more than 10 million retirement savings accounts in 30,000 different retirement plans, they found that the actual money people were saving was not what they said they were doing or even intended to do. For those close to retirement age, being asked to put aside a quarter of their income for retirement is simply met with resistance. These people neither have the money nor the time to watch savings grow.
However, for the younger element, studies show that just putting aside an additional five percent of income (after taxes) in an account producing capital gains and dividend income, will generally throw off enough money to retire when that time comes. When we talk about this group, we are talking about those born after 1961. For the pre-1961 folks, it's a bit dicier. Actually, for those born in the 1950s, putting aside an extra 10 percent should do the trick.
If you like to see this translated into investment numbers, consider the following: If you take investments and put them into a mix of stocks earning a real return of 6.98 percent, after 3.5 percent inflation, and a real return on bonds of 3 percent, less a 1 percent administrative cost, you should be all right. But for those who don’t follow this, then there may be problems ahead. For example, one medical crisis can send retirees into massive debt.
As you can see, a financial planner worth his or her salt has some work cut out. It's not a simple question of asset allocation, either. It's a matter of getting people to save more…admittedly, not an even task.
