We are doing a terrible job saving for retirement. The median 401(k) plan balance is a paltry $18, 986!
While there is raging debate over how much you need to save in order to retire with dignity, everyone would agree that most Americans are falling far short of achieving this goal.
So how much do you need to save?
Ideally, you need to figure out how much your expenses will be when you retire for the rest of your life (and, if you are married, the life of your spouse or partner). This is not easy to do, given the ravages of inflation and a tax code that is subject to change.
Most financial planners simply assume that you will need a percentage of your pre-retirement salary.
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One comprehensive study by Baclays Global Investors determined that 75% of pre-retirement income is a benchmark for a successful retirement. The study also found that, given the typical 401(k) plan savings rate, most Americans could count on replacing only 41% of their pre-retirement income.
In order to achieve the 75% number, an employee would have to save 15% of her income (including the employer match) over a forty year period, with the right asset allocation, and achieve market returns.
However, most investors achieve only one-third of market returns because their portfolios are underrepresented in stocks and many 401(k) plans do not provide an adequate selection of low cost index funds or target retirement funds.
For example, an employee in her 20s should be primarily invested in stocks because she has a long time horizon and does not need to be concerned about short term market volatility. Yet, 47% of this age group have no stocks in their 401(k) plans.
Investment guru William Bernstein cautions that, when boomers retire between 2010 and 2030, the government bailout will make the savings and loan resolution "look like lunch at Taco Bell."
Start early. Adhere to a plan. Invest in a globally diversified portfolio of low cost index funds in an appropriate asset allocation. You can determine your asset allocation by taking the free questionnaire here.
Don't make the mistake of not saving enough for retirement.