Interview: Terry Savage

How Much Money Will Baby Boomers Need for Retirement?

Terry Savage is a nationally known expert on personal finance and a regular television commentator on issues related to investing and financial markets. Her syndicated personal finance column for the Chicago Sun-Times is read in newspapers across the country, and her columns appear regularly on TheStreet.com, the popular investing website. Terry's most recent book is The Savage Number: How Much Money Do You Need to Retire? This is an edited transcript of an interview conducted on August 29, 2007.

"Baby Boomer retirement is going to be like a category five hurricane with only category three levees built to protect it. Just like Katrina, when we saw Americans sitting on rooftops waiting for the government to rescue them. The government will not be able to rescue Boomers who haven't prepared for retirement."

Are Boomers ready for retirement?

Americans as a whole have not saved anywhere near enough. Of course the younger you start, you have time on your side. Even a little bit of money leveraged over time, just doing average market historic returns, can build up to a great sum. If you are in your 40s or 50s, you have to take a look at how much of my current lifestyle do I want to maintain and how much will I be able to afford to maintain.

How much money will we need when we retire?

We are going to live longer and that is going to cost more. You have to factor in inflation, and everybody likes to think they'll maintain their same lifestyle. So you need almost as much, not 50% or 70%, but almost as much money as you do today to maintain your lifestyle. That means you will either have to work longer, maybe not at the same job, but at a part-time job or a business that you have created, to bring in more income – and you'll have to delay retirement so that you can amass enough money and then invest it wisely to make it last.

As we try to calculate how much we'll need, how do we determine the number of years we will live after we retire?

Take a glass of wine and sit down at a wonderful website called www.livingto100.com. There is a longevity calculator there provided by the folks at Eons.com. You fill in your age and some personal things like "Do you exercise?,""How old were your parents when they died, or are they still alive?" and some other things like "Do you wear your seatbelt every time you get in the car?" and – this is what put me over the top – "Do you floss your teeth every day?". Then you click a button and it will tell you how long you are likely to live.

Once you know how long you are likely to live, it is time to take a strong cup of coffee and go to another great website put out by the Employee Benefit Research Institute, a national non-profit, called www.choosetosave.org. There you can fill in all the details of your personal financial situation. Your income now, how much of that percentage you would like to replace in retirement, how much you have already saved, what kind of returns you are going to expect on your investment. A number of things that you will have to think about and then with a click of the mouse it will tell you how much more you need to be putting away every month, or what different kinds of investment returns you need, or how much lower your lifestyle will be than you expect if you don't make some changes now.

What will inflation do to the savings that we have for our retirement?

A simple way to figure out how much we will need is something we use in finance called the Rule of 72. The Rule of 72 says divide any number into 72 and the resulting answer tells you when the value of your money will be cut in half. For instance, at 3% inflation, divided into 72, in about 23 years the value of your money will be cut in half. Which means the day you start retirement you'll need x-dollars to spend, the day you end retirement 25 years later you will need twice as much money to maintain your lifestyle.

What are some of the simple ways consumers can save more?

Time is on your side even if you are in your 50s. If you are really going to live to be 90 and you put away $2,000 a year and get the average historic returns of the stock market, 30 years from now you'd have an extra half-million dollars. Here's an example I give to young kids, but it still works if you are in your 50s. If you put away $2,000 a year in your IRA at the average historic stock market returns, you would have nearly a half-million dollars in 30 years and in 50 years, because of compounding, you would have over $3 million. So if you are 20-something, start now. $2,000 sounds like a lot, but it is less than $40.00 a week. Give up those lattes and start saving.

Most of us aren't professional money managers. When it comes to allocating our 401(k) money, what should we do?

We have turned all of America, everybody who has a retirement account, into a stock picker. What a big mistake. So the great fear of saving and investing for retirement is that it is now a do-it-yourself project. What funds do you want to invest in, how much do you want to contribute? But there is advice available. Every financial services firm recognizes the problem and is gearing up to help you, the Baby Boomer as you approach retirement, decide how much you should be investing and how to do it, and then how to withdraw. Mutual funds, financial advisors, brokers, and there are products in almost every 401(k) plan called a target retirement fund. All you have to do is have the discipline to sign up for the retirement plan, keep putting the money away on a regular basis and the professionals will manage it for you.

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