Raise your hand if there's something you can do to improve your prospects for retirement. If the results of a couple of studies are any indication, a lot of people out there in Fool-land should have their hands held high. According to Retirement Insecurity: The Income Shortfalls Awaiting the Soon-to-Retire (pdf file):
- From 1989 to 1998, the percentage of near-retirees who will not be able to replace half of their pre-retirement income rose from 29.9% to 42.5%.
- Almost one-fifth (18.5%) will live below the poverty level, up from 17.2% in 1989.
- Retirement wealth declined 11% from 1983 to 1998 for households at the median.
You might be thinking, "That was way back in 1998." True -- which means the situation has probably gotten worse, since the study precedes the recent bear market. According to the Employee Benefit Research Institute, the balance of 401(k)s owned by workers in their 50s declined 14.8% from 1999 through 2002. Workers in their 50s who have 30 years of job tenure saw their 401(k)s drop 24.8%.
Then there's this news from the EBRI 2003 Retirement Confidence Survey: 24% of workers age 45 or older plan to postpone their retirement due to financial concerns, up nine percentage points from 2002.
Sure, the problem might come down to plain, old procrastination and the inability to delay gratification. (The Retirement Confidence Survey found that the majority of workers and retirees spend more time planning holidays and social events than they do on retirement planning.) But I believe many of us are responsible, well-intentioned, golden-years-coveting workers who haven't saved enough for retirement because we're just not sure what to do. We get overwhelmed by all the choices available and decisions to be made, a condition known as "analysis paralysis."
We know we have to save for retirement. There might even be IRA enrollment forms in our "to-do" box right now, along with 401(k) forms, a book singing the praises of index funds, and an article claiming that indexing is dead. But because we feel like we don't know enough to make a decision, or because we want to read just one more article before making an investment, the forms go unfilled, and the money goes unsaved.
Essentially, there are three decisions to be made about a retirement plan: (1) how much to save, (2) what account to choose, and (3) where to invest the money. But these decisions can become roadblocks if someone feels she needs to know everything before doing something.
So to help you conquer your analysis paralysis, here are all the answers you need to get started on your retirement plan. Note that this doesn't get you off the hook for doing some real retirement planning. But taking these steps will definitely improve your retirement prospects. (And if you know you won't get around to it, or you need a more personal nudge to get your retirement plan on course, consider our TMF Money Advisor service, which will allow you to talk one-on-one with a financial advisor.)
Roadblock 1: How much to save?
Is saving $200 a month enough? Is $2,000 too little? Depending on where investors are along the retirement-planning process, and which sources they consult, they may be told they have to deposit the equivalent of their mortgage each month in a retirement account. When confronted with such large numbers, people often do something extraordinary: They do nothing. "I can't possibly save that much," they say, "so I won't even bother."
Then there's the question of limited resources. After paying the mortgage, gassing up the minivan, compensating the child-care provider, and ordering an Outback
The quick solution: Save 5% of your pretax salary. Get it out of your hands by having the money taken out of your paycheck or checking account automatically. Starting with 5% should mitigate the effects of "savings shock," but you should work up to saving 10% of your pretax income... at least. If you're within a decade of retirement, can you save 15% or 20%? (If you want a rough estimate of how much you should save, visit our retirement calculators.)
Roadblock 2: Where to put the sav
We have a lot of choices for our retirement money: the retirement plan at work, a traditional IRA, a Roth IRA, an annuity, a regular brokerage account, or even the house (in the form of a paid-off mortgage).
Though it's important to have options, too many choices might be why people find retirement planning daunting. Studies have shown that more choices lead to fewer decisions.
For example, Sheena Iyengar of Columbia University and Mark Lepper of Stanford University set up booths in a grocery store displaying either six or 24 flavors of jam. The results showed that while more shoppers stopped at the booth with 24 flavors, those who stopped at the six-flavor booth were 10 times more likely to buy something. Studies involving gourmet chocolates and optional school essay assignments found similar results.
The quick solution: If your employer matches your contributions to the company's retirement plan, start there. If there's no match, or you've contributed enough to get full benefit of the employer match, then contribute to a Roth IRA, if you're eligible. The traditional IRA might be better for those in a much higher tax bracket now than they will be in retirement. Fiddle with these calculators to see if you're eligible for a Roth, and if a traditional IRA would be better for you.
Roadblock 3: Where to invest the sav
Once again, too many choices might be paralyzing investors. Most retirement plans are expanding their investment options without providing any employee education. What percentage of contributions should go in the large-cap domestic equity fund, the small-cap emerging markets fund, the intermediate-term bond fund, and the exploitation of vices fund that invests in companies dealing in tobacco, alcohol, pornography, and professional football (which are inextricably linked, judging from recent beer commercials).
The quick solution: Choose the investments you're comfortable with. If the thought of investing in the stock market gives you indigestion, then don't do it. You can go with the bond fund choice (though bond funds can lose value, too, as we've seen recently) or the money market/stable value option. It is far more important that you begin saving than that you find the perfect investment (which, by the way, doesn't exist). Then, after more research, you can move into riskier investments, which, over the long term, should provide greater returns.
Whatever you do, just do something. A mediocre plan will always beat an outstanding plan that never became an action.
Robert Brokamp's retirement plan relies on a 401(k), a Roth IRA, Home Depot