As time marches on, it often brings improvements. We no longer have to make sure we're home at a certain hour to watch our favorite TV program; we can just record it and watch later. We no longer have to scour yard sale after yard sale for some elusive trinket we dream of finding -- it's probably available online. A simple computer that we bought in 1988 for several thousand dollars can now be replaced by a much more powerful one that'll only set us back several hundred dollars.
But not everything has improved. Take retirement, for example. Yours isn't likely to mirror that of your parents'. And here are some reasons why:
- Many retirees of yore have relied mainly on pensions. Well, traditional pensions are going the way of the saber-toothed tiger, replaced by 401(k) plans and the like. You're most likely going to rely on a combination of several income streams, such as Social Security, 401(k)s, IRAs, and your savings and investments. In other words, you'll need to plan and save accordingly today in order to meet your future needs. You can't rely solely on your employer.
- Health care is another big problem. It's no secret that health-care costs have been rising rapidly, while at the same time many companies have been cutting health-care benefits for current or future retirees. (IBM and Aetna are two examples.) In retirement, we should expect to pay a lot more for this vital coverage than our parents.
- Another way in which modern retirees' lives are differing from those of traditional retirees is that many current retirees have gone back to work. Some are doing so because they want to, and others because they have to. At the very least, you should consider that you may have a part-time job well into your 70s.
- Your retirement will likely be on a different timetable. Most of us are likely to live longer than our parents, so our retirements may last longer. Yet due to financial pressures, some of us will start our retirements later. (Social Security, following this trend, has upped the age for when you can start receiving full benefits from 65 to 67 for those born after 1959.) For those of us who manage to retire early, we may end up with a 30- or 40-year retirement, versus 20 years for our parents. A longer retirement means our money will have to last a lot longer, too.
Compounding these problems is the simple fact that many of us just aren't where we should be in terms of saving for retirement. (Heck, many of us don't even know, as we haven't even taken the time to run any numbers!) According to the 2006 Retirement Confidence Survey, a full 52% of workers age 55 or older have less than $50,000 saved for retirement!
Let's take a closer look, be somewhat generous, and imagine that you're 55 and you've saved $45,000 (instead of being 62, with $18,000 saved, like plenty of people). You've got 10 years until you hit 65. If your nest egg grows at 10% per year, the stock market's average historic rate, it will grow to about $117,000 in a decade. In our Rule Your Retirement newsletter, I learned that in order to make my nest egg last, I should conservatively plan to withdraw about 4% of it per year in retirement. So 4% of $117,000 is $4,680, or $390 per month. If I add that to my Social Security, will it be enough?
Fortunately for you (and me), all is not lost. No matter how much you've got saved now, you can improve your future condition by taking some action today. Save more, for example, and invest it as effectively as you can. For money you won't need for at least five (ideally 10 or more) years, look to the stock market. Be smart about the tax efficiency of your investments and your asset allocation as well.
One easy way to make sure you keep your asset allocation intact as you age is to buy shares of a target-date mutual fund. Increasing in popularity, these are designed around specific retirement dates, with investments chosen accordingly. The Vanguard 2025 (VTTVX) fund is for those who plan to retire in 2025. It recently had 79% of its assets in stocks and 21% in bonds, whereas its Vanguard 2045 (VTIVX) counterpart had 90% in stocks and 10% in bonds. See what's going on? The fund takes care of shifting your assets as you get older, adding more bonds in later years.
Target-date funds tend to invest in a handful of other funds from the fund family's lineup. The Vanguard 2025 fund, for example, recently had 61% of its assets in the Vanguard Total Stock Market Index (VTSMX) and 4% in Vanguard Pacific Stock Index (VEIEX) -- giving investors domestic and foreign equity exposure. While the former has shareholders invested in the likes of Altria
The Foolish bottom line
As with anything, you'll become a better retirement planner as you learn more about the subject. If you'd like some additional guidance, I encourage you to try our Motley Fool Rule Your Retirement service free for a whole month. Doing so will give you full access to all past issues, so you can bone up on topics from asset allocation to tax minimization to early retirement strategies.
Whatever your financial condition is now, it can soon be better. Just take some steps in the right direction, and your retirement might end up even more pleasant than your parents'.