Imagine your retirement for a moment, and I'll bet you're not picturing yourself in poverty. Yet, that's a disturbing possibility raised by the Center for Retirement Research at Boston College.
The researchers recently measured that more than 40% of households may be at risk for seeing their standard of living decline in retirement. They've now looked a little more closely at the numbers and found that people born after 1955 have an increasing risk of living in poverty.
The risk is greatest for people who find themselves in the bottom third of the income scale. That's not to say that everyone else can breathe easy. The retirement situation is deteriorating fastest for people in the top two-thirds of the income scale. Much of their problems can be traced to the decline of pensions and the rise of retirement plans managed by workers themselves, like 401(k)s.
Here's how the numbers stack up if you're curious where you might sit. Just prior to retirement, people in the bottom third had on average more than $175,000 in retirement assets, made up almost entirely of Social Security. A few also owned their own homes and could count on a small pension.
People in the middle third, whose wealth before retirement averaged almost $653,000, were more likely to own their home and had more financial assets, including retirement benefits outside of Social Security. More expected to receive a pension or rely on a 401(k) or other defined contribution plan.
The average household in the top third had wealth averaging almost $1.3 million prior to retirement. They had roughly the same amount of assets in retirement plans as the middle third, but they counted on more business assets, general financial assets, and other resources.
Wherever you fit in this picture of retirement preparedness, it's not too late to improve your position. You may not have much control over your disappearing pension, but you do have control over how much you set aside on your own.
What can you do? Start saving more yourself, and start doing it now. In a perfect world, we would all have started saving for retirement the moment we received our very first paychecks. In reality, some people have gotten a late start. Don't look back; just start now.
A 45-year-old who puts away an extra $5,000 this year would turn it into $16,000 by the time he or she turned 65, even assuming a pretty conservative 6% annual return. Imagine what a 45-year-old could do by saving an extra $5,000 every year for the 20 years until retirement. That's growing protection against old-age poverty.
Where should you save this extra money? Use all the tax-advantaged retirement accounts you can get your hands on, such as a workplace 401(k) account and an IRA. The tax benefits of these accounts will help you stretch your dollars further. You'll also make it much harder to spend the money before getting to retirement.
What do you do with this savings? Stocks offer your best chance at long-term growth, so long as you have at least five or more years to invest. You'll take on some risk, but you may see a much better return than some other investments, like bonds or money market funds. If you're looking toward stocks in order to boost your retirement income, you may want to take a close look at the many that pay dividends.
Wharton Business School professor Jeremy Siegel, in The Future for Investors, points out that ExxonMobil
Studies have shown that almost half of the 20th century's annual return on stock investments can be attributed to reinvested dividends. Read more about why in John Reeves' article, "Stocks for Dummies." Add some of this dividend power to your retirement portfolio, and start waving goodbye to your nightmares of retiring in poverty.
For related Foolishness:
The Motley Fool's Rule Your Retirement newsletter service wants to help you prepare for the retirement you've dreamed of. Advisor Robert Brokamp has solutions and planning help for you no matter what stage of life you're in. Take a free 30-day trial today to learn more.
Dow Chemical is an Income Investor recommendation, while 3M is an Inside Value recommendation.
Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article, and she welcomes your feedback.
