The Lonesome Shovel Hypothesis

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By and large, Americans are woefully unprepared for retirement. Perhaps you're not surprised to read this; you may have seen some of the ominous headlines. Certainly everyone will agree that preparing for the future is important, but has anyone ever been spurred to action because of a headline that reads "More Than Half of Workers Report They and/or Their Spouse Have Less than $25,000 in Total Savings and Investments"? 1 Or rushed out to open an IRA because of a survey that reports "25 percent of middle class Americans say they will need to work until at least age 80 to live comfortably in retirement."? 2 Probably not, so what is it going to take to get Americans to save more and plan for their futures? Perhaps the answer lies in the difference between urgent and important.

Consider, if you will, the plight of the lonely snow shovel. Everyone knows that if you live someplace where it snows you ought a have a snow shovel, right? Imagine the snow shovel in September and October: just standing there, day after day, watching shopper after shopper go by and grab a light bulb or a toilet flapper valve, just hoping that this will be the person who takes her home - only to have her heart broken time and time again. Poor shovel. But suddenly when the weather people call for snow, everyone wants to take a snow shovel home. But alas, if you're too late to the dance, that lovely shovel can be rarer than a porcupine in a cuddling contest. This is the difference between urgent and important. Even though people know it's going to snow in winter, there were other more pressing issues that brought shoppers to the hardware store that day. But when the storm is coming, the shovel becomes the urgent issue of the day and is suddenly the only thing on most shoppers' minds.

Where should you begin? First, take a look at your employer's retirement plan. If they offer a match, in which your employer contributes money on your behalf when you also contribute, do some investigating. You may be missing out on "free" money. In one common type of match, an employer will match employee contributions dollar for dollar on the first three percent you contribute, and fifty cents on the dollar for the next two percent you contribute. So, if you contribute five percent, your employer will contribute four percent. Contribute enough to get your full employer match and then consider funding a Roth Individual Retirement Account (Roth IRA). Under current law, money in these accounts may grow income tax-free forever. If you are in a higher tax bracket or you have contributed the maximum amount allowable to your Roth IRA, continue funding your employer plan. You can sock away $17,000 this year. If you're over 50 years of age, you get to contribute another $5,500.

If your employer doesn't offer a retirement plan, consider the Roth IRA or a Traditional IRA if you want a current tax deduction. The maximum you can contribute to either a Roth or a Traditional IRA in 2012 is $5,000 if you are under 50 and $6,000 if you are 50 or older. Supplement your retirement savings by investing in a taxable account, too. Your goal should be to save at least 10 percent of your income, if you start early. If you're a little behind in your savings you'll need to save more.

Consider working with a CERTIFIED FINANCIAL PLANNER™ professional; you can find many great ones on the Financial Planning Association's website. You'll get sound advice from a qualified planner who can help you develop a plan designed to achieve your vision. Obviously there's a lot more to this than what's presented here, so working with a professional may offer many benefits.

So, perhaps the answer to our original question is that Americans will save and plan for their future when retirement elevates from merely important, to urgent. When does this happen? About five years before retirement, at which point retirement plans often need to be scaled back to accommodate reality. Are you prepared? Just remember the lonely snow shovel: if you wait too long, don't be surprised if you have to use a teaspoon because there are no shovels to be found.

FPA member Howard Pressman, CFP®, is a financial planner with Egan, Berger & Weiner, LLC in Vienna, VA.

Securities and investment advisory services offered through ING Financial Partners, member SIPC. Egan, Berger & Weiner, LLC is not a subsidiary of nor controlled by ING Financial Partners.

1 Employee Benefits Research Institute: 2011 Retirement Confidence Survey
2 Wells Fargo Retirement Survey, November 16, 2011



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 FPA All Rights Reserved


This article appears in: Personal Finance , Retirement

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