News That You Can Use: Retirement Planning Statistics
Rutgers Cooperative Extension is currently developing a new publication for "catch-up" retirement savers in cooperation with Utah State University and the National Endowment For Financial Education. Below is some helpful information and statistics about retirement planning found while doing research for the book:
On average, however, employees with a 401(k) plan contribute 6.8% of pay to their employer plan (Kiplinger's Personal Finance, December 2001).
The average employer 401(k) plan match dropped to 2.5% of pay in 2000, down from 3.3% in 1999. The poor economic climate is the major cause (Kiplinger's Personal Finance, March 2002).
Assuming a 7 percent return, which means that your money doubles every ten years, a dollar saved in your 20s will be worth almost eight times as much at retirement as a dollar saved in your 50s. Nevertheless, a 50-year old worker taking full advantage of the 2001 changes to retirement savings rules could accumulate $500,000 by age 65. This assumes an average annual return of 8% and savings of as much as $26,000 a year when the new tax law is completely phased in: $20,000 in a tax-deferred employer plan and $6,000 in an IRA (The St. Petersburg Times, November 10, 2001).
It pays to make IRA contributions early rather than waiting until the last minute (April 15 of the following year). During the 20 years through 2000, a hypothetical $2,000 investment in January would have resulted in $26,549 more than someone investing fifteen months later. The analysis assumes that contributions were invested 60% in stocks, 30% in bonds, and 10% in Treasury bills (The Wall Street Journal, December 28, 2001).
There is no longer a limit of 25% of your income when funding a 401(k) or 403(b) plan. This means that low-income and part-time earners can contribute the full amount allowed by their employer or by tax law ($11,000 and $12,000 for those 50 and over) if they can afford it. Many people probably won't be able to afford this, of course. However, there may be cases where there is another major breadwinner in the family who can "reimburse" the lower earner to enable them to take full advantage of the higher contribution limit (Mutual Funds, February 2002).
Investment expenses matter. Comparing two mutual funds with expense ratios of 1.3% and .2%, an investor would have $31,701 more after 20 years on a $25,000 investment in the low expense fund. The illustration assumes a ten percent average annual return (mutual fund company advertisement).
Drawing down savings judiciously is very important. Take too much money out during the early years of retirement and it may not last as long as you do. One study ran some hypothetical models to analyze the long-term results of various asset allocations (i.e., the percentage of funds in stocks, bonds, and cash assets). One interesting finding was that, assuming a portfolio with 50% or more in equities (e.g., stocks, growth mutual funds), there has not been a 25-year period since 1925 when an investor would have run out of money in retirement (Fidelity Outlook, February 2002).
You can get a rough estimate of the amount that will be provided by Social Security by visiting the Benefit Calculators on the Social Security Web site: www.ssa.gov/retire2/calculator.htm.