Savings Woes The Worst Since 1933

By Larry N. Grogan

Some readers may remember 1933. To others, it may be evocative of stories that our parents or grandparents told us. For most of us, though, 1933 represents a dark chapter of American history the Great American Depression. It was a terrible time financially for nearly everyone. People lost everything their money, their jobs, homes and families. Most people would agree that 1933 was one of the worst periods in American history.

If you believe that history repeats itself, we may be heading into another dark period of American history. The Commerce Department reported on 30 January that for the first time since the Great Depression, Americans' personal savings rate was negative. The national savings rate in 2005 was -0.5 percent.

If we dont modify our savings practices, history may repeat itself. But, it doesnt have to be that way. Here are some reasons for and ways to start saving for your future:

Reality #1 Workplace retirement programs are the best way to save for your retirement.

All workplace retirement programs have two common elements you invest your money on a pre-tax basis and it grows tax deferred. Contributing to your retirement on a pre-tax basis allows you to reduce your tax burden immediately without sacrificing your lifestyle to any great extent.

For example, if you earn $50,000 a year and do not contribute to your retirement program, you will pay $13,062 in taxes. If you make a 6 percent contribution ($3,000) to your retirement you will only pay $12,312 in taxes. You just saved yourself $750 in taxes (see table below).

By contributing to your retirement program you have accomplished several objectives:

• You started saving for your retirement

• You reduced your taxes

• You reduced your take-home pay

Is the reduction in take-home pay worth it? It depends on your perspective. Closer analysis will tell us though that we are sacrificing $2,250 of take-home pay for $3,000 towards retirement. The difference in take-home pay amounts to $187.50 per month or $46.88 per week. When you really think about it, what does $46.88 represent to you? A dinner out, a round of golf, a tank of gas? Is it worth sacrificing $46.88 per week for retirement? If you can't afford to contribute 6 percent of your salary, contribute $20 a week. In the coming years, that modest investment will grow quite nicely.

Perhaps you feel like you can afford to wait a few years to start saving for retirement. You just got out of college, you just bought a new house, and you want to have some fun. Go ahead and have fun, but keep in mind the longer you wait, the less time you will have to save, which means you will have to save more in a shorter period of time.

Waiting can be very expensive. The chart below illustrates how the cost of waiting can be substantial. If you choose to wait 10 years to start saving for your retirement, it could cost you nearly $1,000,000. Not many of us can afford to sacrifice $1,000,000 for ten years.

(Assumes yearly pretax contributions of $5,000 of a hypothetical 8 percent annual return)

Saving does not have to be difficult. You just have to make a commitment to do it. Stop trying to keep up with the Joneses. Youve got more important things to keep up with.

Reality #2 You may spend as much money in retirement as you do now.

Retirement means not having to work. So it is imperative that you save. During your retirement, your income may be reduced substantially, but your overall expenses may not.

Many people underestimate their expenses in retirement and as a result the amount they need to save. Its easy to understand why. You will most likely pay off your mortgage in retirement, commute less, and spend less money on clothing for work. However, retirees spend a disproportionate amount of money on health care-related expenses, such as supplemental insurance and out-of-pocket costs for prescription drugs. Many retirees also choose to spend money on things they werent able to do when they were working, like travel.

The bottom line is that you cannot assume that your expenses will decrease during retirement.

Reality #3 Many employers are reducing benefits to employees.

Lets face it. Things are expensive now. And your employer may not be able to afford the benefits youve become accustomed to. Health insurance services have increased 274 percent from 1980-2001. Prescription drugs have increased 237 percent in the same time period. Who can afford that?

As we discussed in Reality #2, many of us will have to pay more out-of-pocket expenses for health-related issues. Reality #3 tells us that we should be prepared to pay more because more than likely our benefits will be altered at some point during our life.

Reality #4 All is not lost.

The future does hold some difficult challenges for us. But we can prepare for the future efficiently, if we are willing and committed. Here is a small game plan for accomplishing our retirement goals:

1. Enroll in a retirement program immediately.
    

2. Maximize your contribution. For workplace retirement programs the limits are as follows:
   
   2006 - $15,000
   2007 - $15,000
   
   If you are 50 years of age or older, you can add another $5,000 on top of that. Its called the "Catch up" contribution.
    

3. Diversify your investment portfolio.
    

4. Review your portfolio's performance and rebalance if necessary.
    

5. Increase your retirement plan contributions each year. If you have already maximized your workplace retirement program, invest in other tax-deferred or tax-free investments.
    

6. Work with a financial adviser to develop a retirement strategy. A professional adviser will assist you with realistic goals, monitor your progress, and help you make adjustments as necessary.
   

It is essential that we save as much as possible. The future is uncertain and we can only anticipate so many financial burdens. To eliminate those burdens, we must save, plan, monitor and adjust.

Larry N. Grogan is president of Grogan Advisory Services, an independent financial services firm in Malta, N.Y. Grogan Advisory Services is one of several programs offered to members as a benefit of their membership. For more information on this or other IEEE Financial Advantage products and services, please visit us online at www.ieee.org/fap.