The Problem With Saving 10% of Your Paycheckhttp://www.fool.com/retirement/general/2010/04/06/the-problem-with-saving-10-of-your-paycheck.aspx Dayana Yochim
April 6, 2010
"Save 10% of your paycheck." This money chestnut handed down through the ages gives the impression to those who follow it that they'll be just fine by the time they retire. Too bad it's not true.
What's missing from the 10% rule of thumb is this vital footnote: "... As long as you start by age 25 and never stop saving 10% of every dollar you earn until age 65."
But that's not what most of us do. Instead, we buy our homes and cars and put the kids through school, and then -- after a few vacations, home renovations, and transmission overhauls -- we finally get serious about saving for the future.
And what does that leave us with in retirement? Not nearly enough.
Who's really picking up retirees' tabs?
Our willingness to pay for our own futures is admirable: In the 2009 survey, the majority of workers (60% to 75%) indicate that they expect to cover the bulk of their retirement expenses from their own savings (including employer-sponsored retirement savings plans, IRAs and other personal investments). And 81% indicate that Social Security will cover some part of their expenses, too.
You might not want to be too quick to reach for the tab: 92% of retirees report that Social Security is the major source of their income. And how much do they rely on personal savings to pay their expenses? Less than half say that money they socked away (in 401(k)s, IRAS or other investments) helps them pay the bills. And 58% rely on income from a pension.
So the question then becomes, how confident are you that Social Security will be around to support you during your dotage? And what about income from a pension? Do you even know of any employers in your field that offer pension plans anymore?
That brings us back to that 10% savings rule of thumb.
So how much should you really save?
If you're a savings late-bloomer, you might want to brace yourself before this next paragraph. Ready?
A study in the Journal of Financial Planning revealed that a 45-year-old will have to sock away twice as much as a 25-year-old to enjoy the same lifestyle in retirement. Wait until age 55, and you're looking at some major belt-tightening -- saving three times as much per paycheck as the young whippersnapper in the next cubicle. Oof.
Four ways to be a smarter saver
1. Milk your workplace for every cent you can
But even if your employer doesn't offer a match, remember, your contributions to a 401(k) (or a traditional IRA) lower your taxable income. So you pay less in taxes now, and the money you sock away grows tax-free until it's time to start using it to cover retirement expenses.
2. Get paid by Mr. Market
Consider this oft-overlooked footnote about the stock market's historical 10% annual return: 6% comes from capital appreciation, and 4% from gains from dividends. Late savers can improve their lot with less risk with investments carrying above-average dividend yields. Many