Save or Suffer: Why More Is More

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Ask a 40-year-old investor looking at the middling balance in her 401(k) how she feels about it and I’ll bet you she says something like this: “I should have started saving/investing earlier.” Could it be that this generation – this student loan-laden generation – of people in their first jobs has actually gotten the message?

A new piece of research from Northwestern Mutual called “Financial Realities” caught my eye this week. In the midst of headlines noting consumer spending is coming back, this study of more than 1,000 Americans age 25 or older (conducted by Harris Interactive in March and April) pointed out that 40 percent of people age 25 to 34 expect to save more over the next 12 months. That’s significant.

Unfortunately, the same qualities that seem to have – thankfully – gripped these folks in their first and second jobs haven’t gotten their hooks into their parents. Only 23 percent of people 55 and up plan to increase their savings over the next year. A look at the rest of the survey tells me that could prove to be a big problem.

Why? Because the qualities that these same people now want most out of their investments are safety, security and steadiness. “Americans have embraced highly conservative attitudes toward money,” Northwestern said in its release, noting that “67 percent prefer products with guarantees to those with potential” and “64 percent prefer products that are lower risk with the potential for lower returns as compared to those that are higher risk with the potential with higher returns.” Women, not surprisingly, feel these things even more strongly than men.

Here’s the thing: You can’t have it both ways.

You can invest for safety and security and steadiness, but unless you put more money into those investments you’ll come out with a smaller pile of loot on the other end. For example, if at age 55 you have a $100,000 IRA, you would traditionally put at least some of it into the stock market where you could – historically – count on a return of about 8 percent (if not more) over 10 years. You’d be taking some risk, but if those historical trends held up you’d have $210,285 a decade from now. If you put it away for safety and earn a 4 percent return, in 10 years it will be worth about $145,000. If you had been planning your retirement based on those earlier assumptions (that you’d have more than $200,000 at age 65) how much more would you have to save to get there? About $475 a month over that 10-year period.

What are your other choices? Scaling down your goals. Lengthening your time frame. The research shows people are becoming more realistic about both. The problem is that although you may be willing to work until you’re 75 or even like Andy Rooney until you kick it, you may not be able to. About two-thirds of Americans will work in retirement – half because they want to and half because they need to. But for a sizable number of those folks, the work won’t be possible, either because the jobs will vanish or their health will go. Even those scaled-down goals might sound good in theory – but one bad hip, one bypass can throw a wrench in those admirable plans.

To my mind, the only solution is saving more – in your 20s, 30s, 40s and, yes, 50s and beyond. The question is: How are you going to do it?

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