Financial Catch Up: How Aging Baby Boomers Can Make Up for Lost Time
O'Neill, Barbara, Journal of Family and Consumer Sciences
With about 77 million baby boomers (age 36 to 54 in 2000) in the U.S. population, financial planning for retirement has probably never been a concern for so many people. Of particular interest to aging boomers is the issue of catch-up retirement planning (read: making up for years when savings did not take place). Increasingly, they are asking, "If I haven't been saving enough, are there ways that I can make up for lost time?" Unfortunately, compound interest is not retroactive. In other words, you can't earn interest on money that was never saved. That's the had news.
The good news is that baby boomers have a number of factors working in their favor. First, they are entering (or soon will be) their peak earning years. In addition, peak spending years are ending as boomers stop buying, trading up, and furnishing homes, and purchase as much "stuff' as they can comfortably store, and also launch children into adulthood. Another favorable trend is that steady stock market gains are predicted for at least another decade. There will be periods of volatility, of course, but, until they start retiring and stop contributing to retirement plans, baby boomers will be competing for financial assets.
A factor in boomers' favor is their long investment time horizon. Even those in their early fifties could live another 35 or 40 years, which is plenty of time for compound interest to work some magic. In addition, many jobs today require brains, not brawn. Boomers employed in jobs where physical strength is not required, and those with technological skills, should be well positioned to work for as long as they want to, start a business, or seek post-retirement employment. According to the 1999 Retirement Confidence Survey, sponsored by the Employee Benefit Research Institute (EBRI), today's workers expect to work longer before retiring than their parents and many (68 percent) say they plan to work after they retire because they enjoy working and want to stay involved.
Therefore, all hope is not lost for 40-and 50-year-olds who haven't set aside much (or anything) for retirement. Time is still on their side. Basically, there are two ways to catch up financially: take action now to increase retirement savings and take action later to decrease the amount of retirement savings required. In other words, sacrifice now (e.g., reduced spending) to free up money to invest or sacrifice later through various lifestyle choices (e.g., retiring at a later date) or a reduced standard of living. Several catch-up strategies can also be combined (e.g., increasing retirement plan contributions and moving to a less expensive area of the country) .
Specific catch-up strategies for financial "late bloomers" are as follows:
Strategies To Increase Retirement Savings
Increase Payroll Deductions- Just a one percent increase in payroll deductions for a tax-deferred saving plan can translate into thousands of dollars at retirement. The 401 (k) Booster Calculator from Advantage Publications (800-323-6809) shows how much more individuals, at various salary levels and ages, would have at age 65 if they saved just one percent more of their salary (e.g., $500 for a person earning $50,000). An assumption is made that plan contributions average 8 % annually and that employees receive 4 average annual pay increases. According to the 401 (k) Booster Calculator, 30-, 40-, and 50-year-old workers earning $50,000 would have $148,948, $56,391, and $18,168 respectively more at age 65 by saving an additional one percent of their pay ($500) annually. If the extra one percent contribution also triggers an additional one percent match by an employer, these figures can be doubled. Obviously, younger workers and those who earn higher salaries stand to gain the most. The best time to increase payroll deductions is when you receive a raise or when household expenses (e.g., child care, car payments, college tuition) end.
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