Don’t Let Yourself Retire Broke!

The economic and stock market recessions of 2007-09 didn�t help those Americans who are nearing retirement age, did they?

While the stock market has mostly come back, folks who didn�t panic and sell out of their holdings during the downturn are generally ahead of the game these days. However, the economic recession forced many people who had been dedicated savers to forgo investing for retirement. For several reasons:

• Many were too scared to stay in or get back into the markets after seeing the Dow Jones Industrial Average fall to less than half of its value, so they just put their money under their mattresses or into very low-yielding assets.
• Others were afraid of losing their jobs, so they put as much of their income as possible into very liquid savings, incurring the opportunity cost of investing in lower-yielding assets instead of the stock market.
• The rest lost their jobs or had to take a cut in pay, putting their savings/investing on the back burner.

8 Clever Ways to Save Your 401(k) or IRA

The result: 60% of Americans, according to the Employee Benefit Research Institute, have less than $25,000 put away for retirement — not counting defined benefit plans and the equity (or none) in your home.

Is that scary, or what? If you�re brave, stay with me here, and let�s look at some even more frightening numbers:

Say, you�re 55 years old, you make $75,000 per year, and you have $25,000 in savings. You�ve decided that you will have to retire with full Social Security benefits, so that means you can�t collect your gold watch until you are 66 and 6 months old. Let�s also assume that Uncle Sam — in those yearly Social Security statements he sends you — says he will �give� you $2,000 per month for the rest of your life, if you wait until full retirement age.

Now, according to the U.S. Centers for Disease Control and Prevention — as of 2009 — the average mortality rate for folks who live in the United States is 78.5 years (76 for men and 80.9 for women). That means your measly $25,000 and your $24,000 annual Social Security payment will, actuarially speaking, need to last you for 12 years.

Let�s just play with some simple math and pretend that you won�t add to that $25,000 in savings, and let�s also assume that you won�t receive a pension. That means you will have $24,000 plus an additional $2,083 (your original $25,000 divided by 12 years of retirement — excluding any interest you might receive on the $25,000), or $26,083 per year to live on for the remainder of your life.

That�s not much! In fact, it�s barely twice the 2012 poverty level of $11,170, as defined by the Census Bureau. And, as we all know, costs don�t stay stagnant, especially the price of aging. Even if you have no debt when you reach retirement age (which is pretty unlikely for most of us), $26,000 a year is not going to take you to the promised land of a truly golden retirement.

Don�t stop reading — the best is yet to come!

While that scenario should strike terror in your very soul, it�s not too late! The number crunchers tell us that employment is improving and the stock market certainly is attractive these days — two very promising trends.

But it also means there is no time to wait. You must act now. Not tomorrow, or next week. I firmly believe that we will see a very strong stock market for at least a year or two, but time�s a-wastin�. You must begin investing for retirement immediately to take advantage of the good returns that you can get right now!

Let me crunch a few numbers to show you how your current financial situation can improve drastically, if you just begin a disciplined savings plan, right now:

Scenario 1

You’re 55 years old; let�s round your time until retirement to 12 years to make the math easier:

If you invest $500 per month from now until retirement, in 2024, at average stock market returns of 10.56% (averaged since 1871), you will have approximately $243,000 in 12 years.

If you can only put in $200 per month, you will have socked away approximately $153,000 in that same time period. That�s not a huge amount of money, but it sure beats the heck out of $25,000, doesn�t it?

Now, let�s see what happens if you are younger and start saving now:

Scenario 2

At a rate of $500 per month, with 32 years to retire (at 67 years old, according to Social Security), all things being equal, you can potentially accumulate $2.6 million!

Investing just $200 per month will reduce that number to $1.6 million.

And that�s if you just earn the average stock market returns. But it is possible to beat those. And I�m going to share some ideas to help you do just that. Tune in next week.