There's a myth going around that I'd like to swat down. It's supported by working people — maybe even you — who aren't saving enough money to live comfortably when their paychecks stop. The myth says you'll be OK, even if you don't increase your 401(k) contributions or other savings. You'll make up for your small nest egg by working longer. The usual phrase is, "I'll work till I drop."
Many retirement experts tell the same tale. If everyone works and saves until 70, most of the retirement income problem does go away.
That's a big "if." In 2011, only 32.3 percent of men and 18.7 percent of women age 70 or older were still employed in some capacity, the Bureau of Labor Statistics reports.
"It's terrible public policy to advise people that they can plan on solving their financial problems by working longer," says Jack VanDerhei, research director of the Employee Benefit Research Institute (EBRI). "You should take control of your retirement now, while you have the chance." That means reducing expenses and pouring everything you can into savings during the time you have left to work.
You might be able to stay employed until 70 if you're healthy, lucky, well-off, work for a company that keeps older employees, or run a business of your own. But the more familiar story is that of older workers forced out of jobs they'd hoped to keep.
Half of the people retired today say they left work early and unexpectedly, most because of health problems, disability or changes such as downsizing, according to an EBRI survey. Those aren't great odds, if you're counting on working to pay the bills.
You can "power save"
The good news is that you can add a surprising amount to your nest egg in just a few years if you squeeze your spending and make saving money your priority.
Say, for example, you're 50, earning $70,000. You've saved $100,000 in a 401(k) and are contributing 7 percent of your pay — $4,900 a year. If you make no change, and have to leave your job after five years, you'll have $169,000. But if you double your contribution, you'll have almost $200,000 — a much more comfortable cushion. If you double your contribution and work for 10 more years, you'll have $336,700. That could be $531,000 if you make it to 65.
(To estimate the gains, I took the past 10-year returns of Vanguard's U.S. Balanced Index Fund, which holds 60 percent in stocks and 40 percent in bonds — the classic investment mix. The stock and bond portions each follow a major market index. Over the decade ending last November, that portfolio earned almost 7 percent a year, after fees.)
At retirement, a bigger nest egg is just the start of the saver's advantage. Even though you'll be using the money to help pay your bills, the savings that remain in your 401(k) or individual retirement account will keep on making long-term gains. "Roughly half of your total lifetime investment return comes from earnings on your savings after you retire and start withdrawing money," says Don Ezra, a retirement wealth consultant and cochair of Global Consulting, Russell Investments.
What if your nest egg is invested more conservatively and doesn't earn an average of 7 percent over 10 years? "In a low-rate-of-return environment, higher contributions to savings make an even more striking difference" to your retirement finances, VanDerhei says.
EBRI estimates that about half of all boomers will have more than enough income and savings for an adequate retirement. Those falling behind tend to have modest incomes, with single women in more trouble than couples or single men. People without access to a 401(k) or other automatic savings account also are falling behind.
By the way, you were probably surprised to learn that a balanced stock/bond portfolio earned nearly 7 percent over the past 10 years. At the moment, we tend to remember crashing stocks, low interest rates and sluggish growth. But the past decade proves the value of the tried-and-true investment formula: Buy, diversify with mutual funds, hold, reinvest dividends and rebalance to maintain your target allocation of stocks and bonds.
"Power saving" now is the way to go. If you lack money at retirement, you'll have to lower your spending anyway, and by much more.
Consult your financial adviser regarding your personal situation.
Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW. She writes regularly for the Bulletin.