What the Looming Retirement Bubble Means for You
byMay 8th 2012 12:52PM
Do you think you'll be ready for retirement?
If that question inspires you to fits of nervousness, night terrors and sweaty palms, you're not alone. Most Americans aren't saving anywhere near enough money to live out their golden years comfortably. Let's take a look at some of the more eye-opening statistics:
- Americans 10 years away from retirement have saved just $78,000 on average, even though the Employment Benefit Research Institute says the average worker will need to have saved $900,000 to maintain his or her lifestyle after retirement at 65.
- The average American has saved just 7% of what he or she hoped to retire on.
- 25% of middle-class Americans now say they plan to work until age 80.
Many people put the blame for the savings deficits on 401(k)s, now the most favored vehicle for retirement funding. A generation ago, most private-sector workers received pensions, which have since largely been replaced by the tax-free retirement fund. Many raid their savings in cases of "income shock" like divorce, sickness, or job loss, and others lost much of their savings in the bursting of the tech and housing bubbles.
One expert put it bluntly, saying that linking investing and retirement has been a recipe for disaster, as most individuals turn out to be poor investors. They fall victim to many of the familiar traps such as buying high and selling low on nervousness, focusing on short-term gains instead of long-term needs, and not diversifying their portfolio.
What You Can Do About It
For those people still saving for retirement, one of the best ways to accumulate a nest egg is with a Dividend Reinvestment Plan.
Buying shares of Dow heavyweights such as AT&T (T) or Verizon (VZ) will guarantee you a yield of 5%, and investors can boost their income to double-digit yields by investing in companies that return nearly all of their capital to shareholders, such as MLPs and REITs. The beauty of a DRIP plan, as they're known, is that reinvesting your dividends enables your savings to grow much faster.
The graph below shows the difference that reinvesting dividends would have made in returns from Altria (MO) had you owned it since the late '60s.
That difference is huge! Without reinvesting dividends, the stock would've returned 11,000% (still outstanding), but with the reinvestment you would've gotten $2.76 million back on an original investment of just $1,000.
What's also great about this investing strategy is that dividends act as a natural floor on a stock price, since the yield will go up if the price falls. If you're buying shares every quarter, a dip in price only means you can get more of the stock.
Look to invest in "dividend aristocrats," dependable companies that have increased their dividends in each of the last 25 years, and avoid stocks -- other than REITs and MLPs -- that pay out more than 80% profits in dividends. A payout level that high may not be sustainable.
What If Time Isn't on Your Side?
Those closer to retirement without the time to make meaningful gains through investing may have to get creative with their decisions.
Retiring abroad, for instance, has become one option for stretching your money out. More than half a million American seniors are now expats, and the number is growing, with many moving to locales in nearby Latin American countries that offer cheap living expenses, warm weather, and relatively short trips back to the U.S. New technologies such as Skype also make it easier to keep in touch with loved ones.
Even with the average Social Security check paying about $1,200 per month, expat retirees can live well in places like Grenada, Nicaragua, or Ecuador on even less. While a sense of adventure may be necessary to make a move abroad, these American enclaves should grow as many baby boomers are forced to confront the hard choices ahead.
Others have advocated making retirement into a "life sabbatical." Here, as the plan goes, retirees spend their first three years of retirement relaxing and enjoying themselves, but also with their eyes out for an activity that interests them and would allow them to earn some money.
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Describing the process, Bob Adams, CEO of New Global Initiatives, says, "When your sabbatical is over, you should have found a new line of work that will help you enjoy the rest of your life and pay for whatever makes it comfortable ... Take full retirement only when you must, when you can no longer be productive."
Another option for cash-strapped property owners is reverse mortgages, which can offer another revenue stream while allowing you to stay in your home.
Whatever decisions you make, sticking your head in the sand or doing a "faith-based" retirement is probably the worst idea. As Bob Adams says, "A retiree who has run out of money and has no idea what to do about it is one of the saddest people you will ever meet, and one of the most difficult to help."
Motley Fool contributor Jeremy Bowman holds no positions in the companies mentioned in this article.