Friday, May 11, 2007

Retirement Saving - Self Service

According to Status on America's Retirement at, Americans are overconfident (49% who haven't saved a penny expect a comfortable retirement) and under saved (49% of all workers have saved less than $25,000). This is in contrast to the reality that companies are changing from a defined benefit (e.g. pension) to defined contribution retirement plans. In 1985, 91% of major companies provided a pension. In 2005, the number had declined to 61%. One can only expect the defined contribution plan percentages to increase.

This means that retirement saving is becoming more self service, with the bulk of the responsibility on the employee. Here's my personal self service plan:

  • Save at least 12% of my income. We currently save about 20% of my gross salary. This helps us in two ways. First, we are nominally grown our net worth by the equivalent of one year's take home pay every four years. Second, we are routinely living below our means. Both factors contribute to our ability to retire more comfortably.

    For reference, I did not always save 20% of my salary. In my very first month of employment, I ran of of money 3 days before the following month's paycheck. However, as I received raises, I always made a point reserving part of savings and part of increased lifestyle. Over time the part of saving has become 20% of my salary.
  • Target for a minimum savings ratio of 12. Currently, our savings to income ratio is 15.1. Since I am conservative, our target savings ratio is 20. Also, I am not planning on social security payments to be available when I retire.
My company does not match 401K contributions. However, I still contribute the maximum that I am allowed.
For more on Reaping the Rewards, check back every Friday for a new segment.
Photo Credit:, Michael Connors

This is not financial advice. Please consult a professional advisor.

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