There's No Scholarship for Retirement

The concept of prioritizing retirement savings is one people regularly avoid for numerous reasons. Some believe the immediate need to save for retirement is trumped up, while others have more important immediate priorities such as saving for a home or funding college. Still others mistakenly believe that the amount they'll receive from Social Security will suffice. And then there are those who choose to ignore the issue completely, expecting plans to magically fall into place. Unfortuntely, the days of magic and pensions are waning and a new era of personal responsibility has taken their place.

Each individual must decide what type of retirement he or she wants to afford. Some people opt for an active retirement filled with travel and adventure, while others look forward to quietly sitting on the porch, reading and visiting with friends. Whichever you prefer, the type of retirement you envision directly correlates with how much money you need to save. Some folks will spend more money during retirement than pre-retirement due to increased available time and flexibility. Some may spend less, as the demands of professional life ease requirements for clothes, travel, continuing education, and the like. What type of retirement you want is a deeply personal decision that takes dreams, foresight and planning. No simple income replacement calculator can provide the answer.

Once you determine the type of retirement you want to have, you should prioritize saving for it over all other investments -- especially if your employer offers a salary matching program. The math is simple.

Employer match programs provide a 100 percent return on investment. Rather than worry about making an 8 percent versus a 9 percent return on your investments, figure out how to get the most money available from your employer -- essentially "free" matching funds. Leaving the match on the table is a huge benefit to your employer and was the reason pensions (defined benefit plans) were tossed out and 401(k)s (defined contribution plans) were brought in. Employees are now personally responsible for their own savings plans, and employers only provide match benefits to employees who choose to take them. Be smart and take advantage.

Even if your employer doesn't offer a matching program, you should always prioritize saving for retirement first. As you near retirement age or retire, there are few alternate strategies for financing your golden years that provide sufficient time to accumulate meaningful growth. The only options are to keep working and/or cut back on expenses. In contrast, there are always alternate strategies for paying for college or affording home improvements.

Let's do some math.

A couple, both age 47, has a combined annual income of $85,000, with each of their employers offering a 3 percent match. They are saving to retire at age 67. If the minimum required to secure the full match is saved each year, it would cost $212.50 a month, or $2,550 annually. With no match, the $212.50 contribution would be worth $110,696.91 in 20 years, assuming a compounded annual growth rate of 7 percent. With the employer match, this amount would increase to $221,393.83.

If our couple doesn't begin saving for retirement until age 60, they would need to put away $1,025 a month or $12,300 a year to achieve the same pre-match amount as if they had been saving since age 47. Assuming the 3 percent salary match, this savings would have to increase to $1,837.50 a month or $22,050 a year. It's highly doubtful that this pair will be able to save $12,300 a year (let alone $22,050 a year) based on their inability to save $212.50 a month. By not planning ahead they have left tens of thousands of dollars on the table and lost the benefits of investing the money over a longer period of time.

So what if our couple starts saving now and accrues the benefit of the employer match and market growth for the next 20 years? Will it be enough? That all depends on the type of retirement they want to have and the influence of other financial factors, including inflation. If their needs are significantly reduced during retirement, then their savings plus Social Security might be more than enough. If they're hoping to have an active retirement with a second home, frequent travel and associated increased costs, it's possible they will still face a shortfall.

A lot can happen over 20 years. The bottom line is to plan ahead by visualizing your retirement, setting appropriate retirement income needs, and implementing an immediate savings plan that takes full advantage of "free" employer matching funds. Make it a habit to review your retirement plan regularly and update key financial events such raises, unexpected expenditures, additional or abandoned plan goals, or even new family additions. Tracking and adjusting your investments will help you ensure they are moving you in the right direction - because the more time your money has to grow, the more money you'll have when you need it.