It’s a sad fact: Americans are finding themselves farther and farther behind on the retirement planning game. Studies continue to drive home the point that many of us — particularly that are younger than 50 — stand to be woefully underfunded when it’s time to abandon our cubicles.
That’s because investors face a new reality of lower yields on fixed-income assets at the same time that fewer employees are enrolled in traditional pension plans, and as more employers pull back on 401k matches (and even 401k participation).
InvestorPlace caught up with Mike Sante, managing editor at Interest.com — a website dedicated to helping consumers make smart financial decisions — and former business editor at the Detroit Free Press to talk about the retirement crisis. Sante refers to this current retirement environment as the “Do-It-Yourself” era — an apt description considering investors increasingly must find new ways to supplement traditional Social Security payments and smaller (if any) pension payouts to secure a “comfortable” retirement.
Here are some excerpts from my conversation with Sante about various retirement issues:
Q: What is your broader view on the state of U.S. retirement?
A: What we’re seeing is this tremendous change in which (retirement) becomes our responsibility to save and prepare for. We are truly in the era of “Do-It-Yourself” retirement.
What we are seeing, and the big change, is the end of the traditional defined benefit pension. As recently as 1998, more than one-half of all seniors 60 and over received some check from a pension … by 2010, that number was down to 43%, and it’s going to drop and continue to drop.
Even people that are going to receive a pension check … may see it smaller than expected as it may have been frozen when they were 45 years old. In some cases, it may just be a few hundred dollars. So the question becomes, “How am I going to replace that income?”
Q: What can we do about this problem?
A: The only real choice any of us have is to save more, and make full use and better use of tax-deferred retirement plans that exist — and we’re primarily talking about 401k and IRAs. Particularly 401k plans.
Q: How do you advise clients today for success tomorrow?
A: The people we really want to talk to are the 30- and 40-year-olds out there who are making decisions today about how they are going to use their 401k and IRAs, how much they are going to put in, and how dedicated they will be to making contributions to those plans.
What we tell folks is if you have a 401k plan in your office, and that is your retirement plan, you have to be involved in it, you have to be taking part.
If you can find a couple of percentage points of your salary, start putting it into a 401k. And then you need a plan to dramatically increase that until you are maxing out that 401k plan.
How do you get to the point where you’re maxing that out? If you are in your 30s and 40s, you are probably going to see a pretty steady increase in the amount of money you make, and you are building up toward your primary earning years. If you simply take a good chunk of the money … and redirect the raises and increases into that 401k, you can watch yourself build up the contributions. By the time you get to the late 40s and early 50s, you are absolutely putting that money away into a 401k plan.
Q: Where should we invest?
A: You have to invest that money smartly. And by “smartly,” we mean you have to be in the stock market in some way.
So many people out there, especially in the 30-to-40 age group, they look at the stock market, and maybe they lost money when the market crashed … but there is simply no other place you can go where you can go to get the kind of returns you need to have the kind of nest egg required to get you through retirement.
What we need to do is have people to become smarter investors … realize that you are looking f0r returns that are going to be coming 20 and 30 years from now, not 20 and 30 days from now, or even 20 to 30 months from now. What matters is that you accumulate shares, you accumulate wealth, and let the 8% average annual return in the market work for you. You certainly aren’t going to get that in CDs!
Q: Any last words of advice?
A: What we say is that “I can’t guarantee you if invest in the market you will have a nest egg to retire comfortably on, but I can absolutely guarantee you that if you don’t invest in the market, you won’t have a nest egg.”
Marc Bastow is an Assistant Editor at InvestorPlace.com.