Super Savers
It's never too early to start saving for retirement.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
July 2005
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When Marine helicopter pilot Eric Sandberg was stationed in Iraq last year, he had a lot of time to think about his future. He started reading magazines such as Kiplinger's Personal Finance and vowed to put his financial house in order when he got home. True to his word, Sandberg began contributing the maximum allowed -- 10% of his pay, or about $500 a month -- to the government Thrift Savings Plan. That's on top of cash he's squirreling away in Roth IRAs for himself and his wife, Mildred. He'll contribute the $4,000 max to each IRA this year.
"When I was in Iraq, I read an article that said 94% of Americans who retire today will have to continue to have some kind of job to supplement their retirement income and that only 6% of Americans will be able to be financially independent," said Sandberg. "That scared the hell out of me. I decided I wanted to be part of that 6%."
Such commitment to future financial security is inspiring for an investor of any age, but it is particularly noteworthy in this first lieutenant's case. Sandberg is 26 years old.
"There's no doubt that starting retirement planning early in life reduces the mental stress and pain later on," says Christine Fahlund, senior financial planner for T. Rowe Price Investment Services, in Baltimore. "If you don't save enough today, you may be faced with the harsh reality later in life of having to cut your expenses and standard of living dramatically. That's why it's so important to start saving as early as possible and to develop a disciplined approach."
The 15% solution
Starting early in their careers, people need to save at least 15% of their salary for their investments to replace at least 50% of their salary (adjusted for inflation) in retirement, according to a T. Rowe Price analysis. Fahlund notes that because most retirees will also receive social security and some will get a pension, their total retirement income may be closer to 70% of their pre-retirement salary -- the minimum most financial planners recommend to meet retirement needs.
"While saving 15% may seem high, you can get to that goal by maxing out your 401(k)-plan contributions and also contributing to an IRA," Fahlund says. "Most companies offer some sort of match in their 401(k) plan, and if yours does, you can include that as part of your 15%." If you save 6% of your salary, for example, and your company matches 50 cents on the dollar, you are already saving 9% of salary.
The Price analysis assumes the investor's portfolio contains 60% stocks and 40% bonds during the accumulation phase and shifts to an even more conservative approach -- 40% stocks and 60% bonds -- during retirement. A more aggressive asset allocation (with a higher percentage of stocks) might produce larger returns and therefore replace a bigger portion of pre-retirement income, but it would also entail greater risk.
The Sandbergs are contributing more than 23% of their pretax income to retirement savings, with 100% invested in a diversified assortment of stock mutual funds. Based on the Price model, they're on track to replace more than 100% of their income, adjusted for inflation, in 40 years, when Eric will be 66. But they hope to do even better than that. Before they were married three years ago, Eric promised Mildred, 30, that they'd be millionaires someday.
Now stationed at the New River Marine Corps Air Station, near Jacksonville, N.C., the Sandbergs watch their daily expenses carefully in order to build future wealth. Taking advantage of discount shopping at the base's PX and commissary certainly helps, but they are aggressively building home equity as well.
The couple own one home in Pensacola, Fla., which Eric bought four years ago when he was in flight school. The place is worth about $150,000, $60,000 more than he paid for it. It's rented now, bringing in enough to cover the monthly mortgage payments. The couple also own a house in Jacksonville, where they live with their 1-year-old son, Connor. They have two cars (but no car loans) and virtually no credit-card debt.
"I've heard that saving 10% of pay toward retirement is sufficient, but sufficient isn't good enough for me," says Eric. "I need to do all I can now to ensure that I have that sure thing."