"People don't plan to fail, they fail to plan." This popular phrase describes those who lack specific plans for retirement. Without a financial "roadmap" to guide them, their "destination" and the amount of time and money needed to get there are unknown. Several studies show a link between the act of planning and subsequent financial behavior. A survey sponsored by NationsBank and the Consumer Federation of America found that, no matter what their income, people with a plan save more money, save or invest in smarter ways, and feel better about their progress than those without a plan.
According to the 1999 Retirement Confidence Survey, 52% of all households have tried to calculate how much they need to save by the time they retire. Those who have done a calculation have saved considerably more than those who have not. The median amount accumulated by households that have figured out how much they need in retirement is $66,532, compared with a median of $14,054 for those who have not done the math.
People who haven't yet calculated their required retirement savings certainly don't lack for resources. A recent search by The Wall Street Journal of the search engine yahoo.com, alone, found 933 Web sites with retirement calculators. Unfortunately, different calculators are likely to produce different results. This is primarily due to differences in the number, type, and complexity of questions asked and each calculator's underlying assumptions.
Some retirement calculators, such as the American Savings Education Council's Ballpark Estimate (www.asec.org), keep calculations simple by making assumptions about one or more key variables (e.g., yield on investments). Other planning tools allow users to make their own assumptions. Caution should be used with all retirement analyses. Assumptions must understood in order to interpret the output correctly.
Five key variables in retirement savings analyses are: age at retirement, amount of annual income needed in retirement, growth rate on investments, amount of money currently saved for retirement, and number of years in retirement (life expectancy). Most planning tools incorporate all of these factors, any one of which can be changed to greatly affect the results of an analysis.
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. Strategies to increase income include: increasing payroll deductions, reducing expenses to "find" money to invest, accelerating household debt repayment, "moonlighting" for additional income and retirement plans (e.g., SEPs) for the self-employed, investing aggressively before and during retirement, automating investment deposits, and maximizing tax-deferral opportunities (e.g., IRAs).
Strategies to reduce the amount of money needed for retirement include: trading down to a smaller home, moving to a less expensive location, delaying retirement, working after retirement, tapping home equity via a reverse mortgage, and making withdrawals from taxable accounts first.
The popular phrase "there ain't no such thing as a free lunch," is a useful description of the retirement planning process. When calculating the amount to save, various decisions have their costs. For example, early retirement at age 55 requires increased saving because the time available to accumulate funds is reduced and withdrawals are extended over a longer time period. Likewise, catch-up planning strategies require trade-offs: working longer versus investing more aggressively, for example, or trading down housing versus contributing more to tax-deferred plans. Fortunately, time is still on baby boomers' side. With specific financial plans and alternatives described above, even "late bloomers" can afford to retire comfortably and have their money last as long as they do.