We’ve been talking a lot about retirement lately, partly because the numbers are just so terrifying: Most Americans have less than $25,000 saved. On average, we save between 5.5 and 7 percent of our pre-tax salaries in 401(k) accounts, when we probably need to save at least double that for a decent retirement. And the stock market, with its paltry returns over the last decade, isn’t helping us out.
To help alleviate our fears—or at least tell us what to do about them—we turned to Olivia Mitchell, director of the Pension Research Council at the University of Pennsylvania. As the mother of two twenty-something daughters and wife of a recent retiree, she’s wrestling with retirement questions in her personal as well as professional life. Here are her 10 suggestions for how we can give ourselves a chance at a comfortable retirement:
Build a bigger nest egg.
Retirement isn’t what it used to be, says Mitchell, largely because our standards for what life should be like at age 70 and 80 have changed drastically over the last century. That means the old standard advice, that one should plan to replace around three-quarters of one’s pre-retirement income, is no longer sufficient.
“Many boomers have been thinking of doing different things in retirement, and those things will cost money. They’re not going to be sitting on the front porch on a rocking chair. They’re going to do volunteer work, travel, and do part-time work. Healthcare costs are likely to be a lot higher in the future as well. So it’s not obvious our expenses will be easily cut, and taxes will likely go up to help bail out the deficit we’re confronting. So a 100 percent replacement rate is a safer place to start,” Mitchell says.
Retire at age 65 or later.
The concept of retiring at age 62 is not realistic for many Americans. “A significant portion of the baby boom generation—more than half—is not adequately prepared for retirement, especially if they retire young.… If you delay retirement, benefits will be higher, and you’ve deferred eating into that nest egg for more years. My husband just quit work at 63, and I said he couldn’t claim Social Security until he’s 70,” says Mitchell.
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Don’t try to follow your parents’ example.
That’s because mid-career workers today are unlikely to see a repeat of what their parents experienced: housing prices that grew quickly and substantially. A stock market that blossomed for much of their working lives. And in some cases, generous pensions.
“If we were to extrapolate from our parents’ generation, we might think, ‘We really don’t have to save that much because it’s happening automatically.’ [But] we now realize that putting all our money in one house is a really silly thing to do. It’s not diversified and values can plummet. We saw what happened to the stock market, on top of Social Security and Medicare facing extraordinary financial challenges,” says Mitchell.
That’s why we can’t look to past generations for guidance, and one reason why boomers feel so much angst about their retirement prospects. “They really wish that the past would be replicated in the future, and it probably won’t be,” she adds.
Mitchell encourages her own two twentysomething daughters to put aside between 15 and 25 percent of their income now. “If we’re all going to live to 100, we’re just going to have to put aside a whole lot more money than in the past,” she says.
In response, her daughters ask why they should bother, given the low-to-nonexistent interest rates paid on savings accounts and paltry stock market returns. Mitchell acknowledges that there are no easy answers. “That’s a huge obstacle we’re going to face when it comes to convincing the younger generation to save,” she says.
Plan on a second (or third) career for retirement.
“You’ll need to retrain, retool, and potentially return to school for a new career. You can’t afford to be 50 and have no marketable skills. You have to always push yourself and encourage yourself to take the next step, whatever it is—software on the computer, skills in a profession. If you don’t, you won’t be employable,” says Mitchell.
Proceed as if you’re living to 100.
No one knows how long they’ll live, which means we should all assume we’re living for a long time—and prepare accordingly. “It’s very, very expensive to live to be 100, and you don’t know if you will be one of those or not,” says Mitchell. She adds that women born today have a 1 in 4 chance of living to age 95, especially if they are educated and have access to healthcare. That means setting aside as large a chunk of your income each year as you can manage— perhaps as much as 40 percent, given the low returns savers and investors currently face.
Invest, even if you feel slightly uncomfortable.
Target-date funds that shift assets into more conservative investments as a target retirement date approaches can help investors who feel overwhelmed to the point of paralysis when it comes to picking funds. “Not doing anything is the wrong response. It’s better to save something and put it in a diversified fun with a professional manager who’s managing the glide path for you than to do nothing. At least you have a prayer of building up savings,” says Mitchell.
Meditate on your future self.
“Saving is just no fun at all. In this world, we feel rewarded by shopping, by spending—you get to try it on and wear it to the next party. Whereas saving is the reverse. You’re telling yourself you cannot consume something today, you have to set it aside for a rainy day, or for when you’re 90 years old. So it’s hard for young people to visualize,” says Mitchell.
That’s why she’s intrigued by new research that suggests that showing people an aged picture of themselves, depicting how they’ll look at an older age, helps them decide to save more now. “The idea is to put you in touch with your future self, so you might begin to care about that future self and take good care of that person,” she says.
Learn the basics.
“Most of us will never be mathematicians, but we have found that a little bit of knowledge goes a long way,” says Mitchell. Her research has found that even a simple financial literacy class in high school, for example, can increase savings rates later in life.
Know that it’s not just about the money.
Says Mitchell: “It’s worthwhile to invest not just in saving and pension accounts, but in your human capital—you need training to be successful in that last third of life. And I also encourage people to invest in friendships, communities, families, because it is those networks that will help us age more successfully.”