How Should We Plan For Retirement?

When it comes to imagining our retirement, most of us are in uncharted territory. People in their twenties and thirties today will live longer than any generation in history. If they retire around age sixty-five they’ll need to keep supporting themselves for two or three more decades — longer than any other generation has ever gone without working.

Who decided we should retire at sixty-five anyway? The lawmakers who passed the Social Security Act, which allows people to collect Social Security benefits at that supposedly “golden” age, expected most people to die before age sixty. (The average life expectancy of someone born in 1935, the year the Social Security Act passed, was fifty-nine.) But by 2000 the average life expectancy was nearly seventy-seven — some twenty years longer.

The upshot is, retirement in twenty or thirty years will probably look very different than our traditional ideas of retirement. We may work longer, launch second (or third) careers later in life, reduce our expected standard of living, or make other changes in order to support ourselves after sixty-five. Along the way we should place ever more emphasis on saving and investing for retirement.

“OK,” you say. “We’re convinced. How much should we save for retirement?” We can’t tell you. Nobody can. The truth is, there’s no way to know for sure how much you’ll need or how much you should save each year. The future is simply too uncertain.

It’s like the question of how much to save for college: you need to make so many assumptions about the future that all estimates are suspect. If you ask financial planners for a monthly or yearly savings target that will guarantee you a comfortable retirement, they will typically come up with a number so high you’ll never be able to save it.

But that doesn’t mean you can’t plan.

One way that companies prepare for an uncertain future is by investing in research and development (R&D). Pharmaceutical companies, for instance, are always searching for the next miracle drug.

It’s a matter of survival: if they have a current blockbuster drug bringing in big profits, the patent on that drug will eventually expire. They’ll need to find and develop another product to keep their revenues up. R&D is a risky endeavor that might not produce the desired rewards — but it’s riskier to not invest at all. By the time drug companies reach the date when their patent expires, their R&D efforts have typically yielded one of four results: success, partial success, a delay of the goal, or missing the goal.

Families approaching retirement find themselves in the same four situations. Some have saved enough to remain financially stable for the rest of their lives, but many fall into the “partial success” category and are forced to dramatically lower their spending once they retire. Meanwhile, many families end up postponing retirement for a few years, or even indefinitely.

You can boost your chances of retiring successfully by making savings a priority. You might not save up as much as you’d like, but you’ll be a lot better off than if you didn’t save at all.

Get Real: The Family CFO Retirement Plan

The real question when it comes to retirement savings isn’t “How much should we save?” it’s “How much can we save?” It’s impossible to estimate accurately what you’ll need in retirement and how much to save monthly in order to have that cash. But you can try to align your savings with your priorities (saving more if retirement is a higher priority, less if it’s a lower one). And you can make smart decisions about how to make the most of that savings.

When companies decide how much to put into R&D, they figure out what they can spend without compromising more immediate goals. But they don’t just throw money into research. They try to hire the smartest scientists and fund several different directions of research, knowing they won’t all pay off.

Similarly, the couples we spoke with who saved most successfully for retirement tried to invest as much as they could as strategically as they could using tax-advantaged savings plans. They also spread their investments around, putting their money into different types of investments — some conservative, some risky. We looked at what successful couples did and boiled their experiences into four simple steps.

1. Maximize your tax-advantaged retirement accounts.
Put as much as you’re legally allowed into all the tax-smart savings plans you qualify for. Historically those plans have included 401Ks, IRAs, and Roth IRAs, plus plans for self-employed people, government workers, nonprofit employees, etc. But tax laws change every year and so do the tax-advantaged alternatives that might be available to you. Check with your employer and your tax planner (or visit the IRS Web site at to learn which retirement plans you qualify for. Find out:

  • Which accounts are available to you through your work and as an individual.
  • What tax advantages they offer (see chapter 5 for a refresher).
  • How much you can contribute.
  • Whether your employer matches part of your contribution.

If you’re not maxing out now, make it your goal to increase your savings gradually until you’re putting as much money as you’re allowed into all the tax-advantaged plans you qualify for; see Strategies for Maxing Out on pages 202 and 203. Contribute as much as you’re allowed to before investing in other retirement vehicles, particularly if your employer matches a percentage of the money you put into retirement. If you forgo a match, you’re walking away from free money!

Note: If you think you’re already contributing the maximum amount allowed by law to your retirement plan, think again — there’s a good chance you’re wrong. In 2003, 47 percent of workers thought they were contributing the legally allowable maximum to their accounts, but only 11 percent actually were, according to a study by Cigna Retirement and Investment Services. So check with your employer as soon as possible to make sure you’re right.

2. After you’ve maxed out tax-smart plans, make additional investments.
If and only if you’ve fully funded your tax-advantaged retirement accounts then consider other retirement investments. If you are ready for more investments, go to chapter 5 and review the questions to ask for long-term investments. Remember to match risk with your time frame.

3. Spread your investment into different “risk buckets.”
Companies need to pursue a variety of R&D projects because some will pay off and others won’t. Similarly, your retirement funds should be diversified — that is, invested in a variety of different “buckets” with different degrees of risk. Set goals for how much of your savings you want to go into low-risk, medium-risk, and high-risk buckets. Typical buckets include cash/money market funds for low risk, bonds/bond funds for medium risk, and stocks/stock funds for high risk.

To determine how to distribute your investments between conservative and risky buckets, refer back to chapter 5 and read up on risk and investment vehicles. Your retirement plan advisor or broker might offer recommendations about the right mix of investments for you — but be sure your personal priorities and goals drive the recommendation.

Don’t fall into the “I have lots of accounts so I must be diversified” trap. Diversification doesn’t mean “buy more.” It means “hold more than one type of asset, with different types of risks.” If you own mutual funds with two different companies but they both invest primarily in large-company stocks, that second fund doesn’t add much diversity to your portfolio — those two funds will probably perform similarly. Make sure you understand what you own and how its risks and potential returns differ from your other assets.

Diversification is a two-tier process: first, you want different kinds of assets (cash, bonds, stocks, real estate); then, within the riskier assets like stocks, you want multiple assets. In real estate you’d be better off investing in multiple properties than owning just one beach home. Equity mutual funds, or stock funds, which own many stocks, are more diverse than individual stocks.

If you have more than one equity mutual fund, you want funds that invest in different kinds of stock (large company stock, small company stock, foreign stock, etc.). Some mutual funds own diverse assets: balanced mutual funds, for example, own both stocks and bonds, providing you a more diverse portfolio, although one that may not appreciate as aggressively as a stock-only fund.

4. Monitor your progress.
At least once a quarter the Investment Manager should assess all retirement investments to make sure they’re performing as they should. Also, make sure your savings are divided into the risk buckets you’ve targeted in Step Three: If you want 50 percent of your retirement investment in a large-company index fund, 25 percent in small-company funds, and 25 percent in bonds, for example, make sure your investments are still in the right proportions. If your investments are off target, move them back toward those targets or “rebalance” your portfolio.

Copyright © 2004 Mary Claire Allvine and Christine Larson

The Family CFO Excerpt from The Family CFO: The Couple’s Business Plan For Love and Money by Mary Claire Allvine, C.F.P., and Christine Larson. Published by Rodale; January 2004.

Mary Claire Allvine, C.F.P., is a principal in the Chicago office of the prestigious financial planning firm Brownson, Rehmus & Foxworth Inc., where she advises high-net-worth families and senior corporate executives on investments, cash management, estate planning, charitable decisions, and tax management. She received her MBA from the University of Chicago. Frequently asked to speak, she has shared Family CFO concepts with groups nationwide.

Christine Larson has been writing for national magazines since graduating from Princeton University in 1990. Her work has appeared in the Wall Street Journal, Forbes FYI, Details, Cosmopolitan, Glamour, Parents, and numerous other publications. She writes frequently on business, personal finance, and careers, and has spoken and moderated panels at numerous business conferences. She also teaches writing at California State University, Sacramento.