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Robert Powell
Dec. 2, 2010, 12:01 a.m. EST
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Give thanks for U.S. retirement system
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By Robert Powell, MarketWatch
BOSTON (MarketWatch) "” Odds are that you're an anything but average, but for a moment, let's pretend you are. And, if we pretend you're an average 60-year-old with a 401(k) plan, we may surmise that you don't have enough saved for retirement.
According to a recent study by the Employee Benefit Research Institute and the Investment Company Institute, 401(k) participants in their 60s had an average account balance of $144,000 at the end of 2009. Workers in their 60s who have been participating in the same 401(k) plan for more than 30 years have on average $197,472 in their plan. Read the full study at EBRI.org.
Given the U.S.'s growing deficit, it's possible Congress could end the Roth IRA tax-free-earnings perk, but other changes are likelier, experts tell MarketWatch's Robert Powell, in the Q&A session of a recent roundtable talk. Plus: Estate taxes.
Those numbers don't tell the whole story. They include only what that average worker has socked away in his current employer's 401(k) plan, and none of the money that he might have in a former employer's plan. It doesn't include any money in IRAs, Roth IRAs, or taxable accounts. And it doesn't reflect how much money a worker's spouse might have set aside for retirement.
"It's so hard to judge retirement adequacy with one statistic like this," said Stephen Utkus, a principal with the Vanguard Center for Retirement Research.
Nonetheless, assuming you look a little bit like the average worker in your 60s with a 401(k) plan, you should be do at least four things now.
If you're in your 60s and all you've got saved is $200,000 in a 401(k) plan, it's time to start socking more away, said Christine Fahlund, a certified financial planner and vice president at T. Rowe Price Investment Services Inc.
Using a common rule-of-thumb withdrawal rate, you would withdraw 4% of your $200,000 nest egg in the first year of retirement, or $8,000. That amount is likely to be inadequate. "Without a sizeable pension, this will not be enough for most retirees to live on, even with Social Security benefits," Fahlund said.
Others agree that if you are in your 60s and have little else but $200,000 in your 401(k), now would be a good time to reduce consumption and increase savings.
"The average savings amount is miniscule compared to what they need to finance their retirement," said Jim Otar, the founder of RetirementOptimizer.com and author of "Unveiling the Retirement Myth."
"You need about 30 times in assets of the initial withdrawals during the first year of retirement," he said. For example, if you need $30,000 per year indexed to inflation starting at age 65 until age 95, then you need $900,000 in your portfolio at age 65. Read more on tax strategies for retirement.
Workers in their 60s had a much more conservative asset allocation than the average participant, the EBRI study found. At year-end 2009, those in their 60s had about 32% in equity funds, almost 8% in target-date funds, 7% in balanced funds; 14% in bond funds; 7% in money funds; 20% in guaranteed insurance contracts or GICs/stable funds; 8% in company stock; and 4% in other types.
According to Utkus, it would not be imprudent if the typical worker in his 60s had 40% of his 401(k) invested in equities, inclusive of the percent invested in balanced funds and company stocks.
"That's not unreasonable and [is] consistent with our own approach to asset allocation by age," he said.
That said, there are still participants, regardless of their age, who will still hold too-extreme equity allocations.
"My advice to all participants, but particularly those on the cusp of retirement, is to adjust their equity allocations to a sensible level, and avoid the temptation to take too much, or too little, risk in equities," Utkus said.
Robert Powell writes about retirement issues and produces the "Retirement Weekly" subscription newsletter.
There's a minor problem with calling an organization corrupt, and then asking said organization for a favor, as the U.S. and England discovered in failing to secure the World Cup.
12:38 p.m. Today12:38 p.m. Dec. 2, 2010
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