Retirement savings: How much is enough?

This year I've resolved to help my daughter get started on saving for retirement. She hasn't worked the types of jobs that have employer-provided savings plans, and a broken jaw and Hurricane Katrina meant a couple of prolonged periods without any work at all.

My plan is to get her into a Roth IRA. A Roth is different from a typical individual retirement account. With a Roth you pay taxes on the money as you put it away but it grows tax-free forever after. Other IRAs don't tax you up front but take a bite after you start drawing out your savings. Since my daughter pays very little in taxes, a Roth is probably a good bet for her.

She has a good chance of never having a traditional pension. As 401(k)s have taken off, the number of private-sector U.S. workers who can count on monthly checks from pension plans after retirement has dropped to 18 percent in 2005 from 39 percent in 1980, according to the Employee Benefit Research Institute. That's why it's critical for all of us to save enough to fund our daily lives after our paychecks disappear.

But how much do you need? One group, the Retirement Solutions Foundation, says you have to put away 10 to 12 times your salary at retirement to have financial security after your working days are over. But I don't know that there is a single right answer to the question. It depends on how much you spend, how long you live and how much you have.

The grimmest fact, however, is that most of us, my daughter included, are a long way away from having enough set aside for a secure retirement.

As many as 35 percent of all workers have less than $10,000 in total savings and investments, excluding the value of their homes and any traditional pension, and 48 percent have less than $25,000 socked away, according to most recent assessment from the Employee Benefit Research Institute.

The numbers are worse for young workers — 50 percent of those age 25 to 34 have less than $10,000 put aside. At least they still have time to catch up. That's the good news for my 31-year-old kid.

If you're among the 26 percent of workers 55 and older with less than $10,000, I hope you have a traditional pension.

Only 7 percent of workers have more than $500,000 saved — among workers 55 and older the figure was 17 percent. At the other end of the spectrum, 4 percent of workers aged 25 to 34 had more than half a million dollars in savings.

The low savings level and the widespread absence of workplace savings programs have prompted some changes. Rules governing retirement savings plans have been improved and proposals have been put forward to make the plans more widely available.

More companies are automating enrollment in workplace plans, allowing workers to opt out rather than requiring them to opt in, according to Hewitt Associates, which advises companies on plan design. Automatic enrollment is one of the fixes expected to increase worker savings. About a third of all companies now use automatic enrollment. The participation rate, which is the percentage of salary deducted from the worker's check, is set at 3 percent of salary in most of the plans. Many companies also automatically increase the amount with each year of employment.

Almost all the employers in the Hewitt survey said they contributed to their workplace savings plan. The most common type of match is 50 cents for every dollar the worker saves, usually up to 6 percent of pay. Most also offer a variety of investment options, including target date funds. These funds invest with a specific retirement date in mind, and shift from riskier but potentially more rewarding investments, such as stocks, to more conservative ones as the employee draws closer to retirement.

Fewer companies are using only their own company stock to match employee savings, instead allowing workers greater investment diversification with a broader array of options. Companies that restrict options to their own stock have declined to 23 percent, down from 36 recent in 2005.

Another survey showed that workers on the leading edge of the baby boom have made progress in preparing for retirement. MetLife's Mature Market Institute surveyed 1,000 folks who are turning 62 in 2008 and found that their net worth (excluding home value) averaged $257,800. Their average annual income was about $71,400.

Thirty-one percent plan to apply for Social Security when they turn 62, while another 32 percent say they will wait until age 66 or beyond when they can receive full benefits. Forty-seven percent say they are covered by a traditional pension plan, a benefit of working through an earlier era. Half have a 401(k) plan, and half have an IRA.

Most — 85 percent — own their homes which have an average value of $297,900. A quarter plan to move to another area for retirement, and 22 percent have long-term care insurance.

"They're comfortable being identified as a baby boomer, and, contrary to claims that they're not ready to retire, only 18 percent dislike the term 'retirement' to describe their next transition," said Sandra Timmermann, director of the MetLife Mature Market Institute.

On the other hand, she noted, "On average, as far as they're concerned, they're not really going to be 'old' for another 17 years."

Age 79? Trust me, when we get there, it will be the new 60.

Hamilton is a former Washington Post financial reporter and editor

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