Retirement Saving and Investing Americans

Retirement Saving and Investing

Americans do not save and invest enough for retirement. The typical couple begins at an early age meaning well, but doing little. They may have a savings account, but in times of financial stress are apt to spend it. They may have 401(k)s, home equity and stock appreciation, but these alone account for little when it comes time to retire. These 401(k) savings are easy to cash out when changing jobs and, should the retiree expect to utilize these when retiring, will find that they may not amount to one year's salary. Savings accounts and bonds yield little interest. What is the average American to do in order to save enough to retire comfortably?

Securities Industry Association report on retirement savings says today "nearly half of all American households are not saving at all and only about one-third of all U.S. families are saving enough to maintain their standards of living in retirement." Paul Merrell of MarketWatch, Inc. recommends that those saving for retirement save at least 10% (Paul B. Farrell, Exploding the Savings Myth, Fox News.com, Marketwatch, Inc., July 11, 2006). However, Charles Schwabb recommends that if you save different amounts at different times of your lives. A person in their 20's should save between 10% and 15% of their income for retirement, while, if the person is in their mid-40s and older, they should save more than 35% of income for retirement. The assumption is that the person is just starting to save and the goal is to maintain your lifestyle over 30 years of retirement. (www.schwab.com/public/schwab/planning/retirement/saving/strategies, Retrieved August 16, 2006)

Charles Schwabb also recommends that one maximize contributions to existing 401(k), 403(b), 457, or other qualified plan, establish a traditional or Roth IRA to benefit from tax-deferred growth and consider an Individual 401(k), SEP-IRA, or profit-sharing plan if the potential retiree is a small business owner. Here, Paul Merrell disagrees with Schwabb and other brokers, saying that this bright picture is placed before the potential client in order to sell the product that they offer. No matter the picture, the truth is that 83% of the near-retirees (which included the oldest cohort of baby boomers) believe that it is very important to generate an income that provides a comfortable retirement lifestyle. But barely 20% say they are well informed on how to do so. (Prudential Financial, quoted by Paul Farrell, Ibid.)

Not only are the majority of Americans ignorant as to how to save, but most don't really want to. "From the 1950s through the 19890s, Americans were saving over 10% annually. Since then, our spirit of thrift spiraled into a negative savings rate." (Paul Farrell, Ibid.)

In the book The Retirement Savings Time Bomb...and How to Defuse It, by Ed Slott (Penguin Group, 2003, New York, NY), he deals with The Crime of the Century (the fact that one will not be able to retire on one's savings) and what to do about it. He proposes five easy steps to protecting Retirement Savings from the Tax man, timing of withdrawal, Insuring it, Stretching it, putting it into Roth IRAs and how to avoid the Death Tax Trap. He also deals with what to do when things don't go as planned.

One of the major problems, says Ed Slott, is losing any benefits one might gain from savings in 401(k)s to taxes. To avoid this he gives a "Word to the Wise" on page 134: Whether the spouses beneficiary elects to roll over the inherited account or remain beneficiary, he or she should name a beneficiary and a contingent beneficiary on the account immediately!... Neglecting to do this is the number one mistake made by spouses who inherit because it is the key to the survival of the account after the spouse's death, and it's the key to keeping it in the family."

On page 68 he says taxes on 401(k) NUA lump-sum distributions have changed. "At one time, this special break tax break for easing the burden on lump-sum distributions from ompany plans was available two ways: using 5-year averaging or 10-year averaging. Now just 10-year averaging is used if you qualify for this tax break." In order to qualify for 10-year averaging you must have been born before 1936, you must take the distribution all in one tax year and you must have been in the plan for at least five years before the year of the distribution. He suggests that 403(b)s be rolled over into IRAs when one retires and this account protected with sufficient life insurance. This way, any savings and retirement accounts will be passed on to one's beneficiaries without major tax penalties. He states a case where a Mr. Albert Lemishow in 1993, wished to roll over the stock in what he thought would be a tax-free transaction. He was highly taxed on his Keogh self-employment plan and IRA accounts that he bought stock with and fought the IRS for five years.

In the book I'm in Debt, Over 40, with No Retirement Savings. HELP! By John L. White, (published by Everlove and Bohannon Publishing, 2004, Wesley Chapel, FL) he suggests people develop the discipline to start saving for retirement beginning with their very first job, so by the time one retires, there is enough to retire on.