A new survey on retirement saving suggests that too many younger Americans are relying either on wishful thinking or blind faith. There is a difference between the two, though they both lead down the same path.
A T. Rowe Price survey of investors between the age of 21 and 50 showed that most at least recognize the need to save for retirement. However, most are not taking adequate measures to finance a secure retirement.
Saving without a plan
The good news is that among the investors surveyed, 92 percent who can contribute to a 401(k) plan are doing so. However, here is where the wishful thinking and blind faith come in:
- Wishful thinking. Sixty-eight percent of respondents are contributing less than 10 percent to their 401(k) plans. Thinking you can fund 20 or so years of retirement on less than 10 percent of your income is unrealistic.
- Blind faith. Twenty-nine percent aren't even sure how much they are saving for retirement. Not knowing where you are going but still expecting to get there is a poor strategy.
Remember, this was a survey of investors, so at least they have a leg up on people with no investments. The average American is probably even less prepared for retirement.
Essential ingredients for adequate retirement planningThe alternative to relying on wishful thinking and blind faith is to have a sufficient retirement plan. While there are many details involved in financial planning, these three ingredients are essential to creating an adequate blueprint:
- Don't generalize. T. Rowe Price suggests that people should save 15 to 20 percent of their annual income toward retirement. Those are reasonable estimates to help give people who are just getting started something to shoot for, but ultimately there are too many personal variables for that kind of generalization to work as the basis for a retirement plan. You won't find the right savings target for your situation unless you run some detailed calculations that show how you get from where you are today to where you need to be.
- Make conservative assumptions.With global growth slowing, bond yields below 2 percent and rates on savings accounts below 1 percent, you need to use much more conservative return assumptions for stocks, bonds and cash equivalents than in the past. Oh, and don't forget to factor in inflation, so you won't be trying to pay for a retirement at future prices in today's dollars.
- Adjust annually. A financial plan involves projecting several uncertain variables over a very long period of time -- in other words, it is far from an exact science. Once a year you need to check where you are relative to your plan, and adjust your savings accordingly.