Avoid Retirement Poverty

Even if you've saved nothing for retirement, it's not too late to start.

March 23, 2010 — -- A whole lot of Americans could be looking at a choice between working into their old age and living a life of poverty in retirement.

That's about the only conclusion I can draw from a recent survey that indicates more than half of all American workers have saved little or nothing for retirement.

A survey released earlier this month by the Employee Benefit Research Institute found that 54 percent of American workers have saved less than $25,000 for retirement, with half of those people saying they had less than $1,000 saved for retirement.

Yet, nearly a third of those who say they have virtually nothing set aside say they are "very" or "somewhat" confident that they will have enough money for a comfortable retirement.

I say, think again. Because when it comes to retirement, you're on your own.

The traditional pension plan has all but disappeared for non-government workers, and Social Security isn't going to be enough even under best case scenarios.

You're on your own. And that's why that 54 percent of American workers with less than $25,000 needs to get going when it comes to saving for retirement.

Now, I already know what many readers will say in response -- it can't be done, it's impossible, the economy's terrible, there aren't enough jobs, I don't make enough, I can't pay my bills, there's nothing left at the end of the month.

And in most cases, I say, you're wrong. The only group I buy it from is the unemployed. Saving money when you don't have a paycheck is impossible.

Otherwise, if you have a job, you can save for retirement. It's just a question of how you do it.

Here are five steps for anyone in that 54 percent of workers with little, if anything, saved:

1. Start small: If you honestly believe you cannot save for retirement, then start by contributing just 1 percent of your gross pay to a tax-favored retirement savings plan. If you think you can afford a little more, try 2 percent. Your first savings plan choice should be an employer-sponsored plan like a 401(k), 403(b) or SIMPLE IRA. If you lack that option, then open an IRA that allows for automatic contributions that can be transferred from a bank account to the IRA on the same day you get paid.

In terms of take-home pay, you should barely notice the impact of 1 percent of your salary being directed into savings. We're talking $5 a week if your weekly pay is $500.

2. Step it up: After six months or a year of making the 1 percent contribution, bump it up by 1 percentage point to 2 percent total. Then do it again and again. That $5 a week becomes $10 and then $15, $25, $30, etc. Schedule the increase so it's an annual thing, maybe on Jan. 1, your birthday or the time of year you might qualify for a pay increase.

3. Maintain the momentum: I won't kid you, saving $5 a week to start is not going to provide for a bountiful retirement. The key is saving $5 a week gets you started, builds some momentum and then builds on that momentum as you step up the contributions gradually. Once you get up to saving 10 percent or more of your salary, then you're in a territory where you can have a serious discussion about when you might retire.

4. Demand a match: Any employer serious about looking out for the welfare of its employees should be contributing something to its employees' retirement security. That could be in the form of a traditional pension plan, but in most cases it will be in the form of a matching contribution to a 401(k) or some other retirement savings plan.

If your employer contributes nothing to your retirement, then look elsewhere for a new job. Yes, it's a tough job market right now, but that will change. So gear up now for a job search, and then move when opportunity allows.

5. Save first, and then calculate later: Retirement planning experts often talk about the need to calculate "The Number." That is the amount you will need to accumulate to reach your retirement income goal. And they are correct. At some point, you will need to know how much you should be saving to achieve your retirement goals.

But for the beginning saver, The Number can be overwhelming and does more to discourage than encourage. My belief is that it's best to get started saving first, establish momentum and then step up the savings effort before calculating The Number. Only do the calculation after you've built a bit of a nest egg.

I know that despite my best efforts, there will be some readers who still doubt they have any hope of saving anything for retirement. All I can say is that I've seen it work with people of modest means.

In my financial planning practice, the people I've met in the best financial shape have not been necessarily those with the biggest salaries. Rather, it's often folks with modest incomes who saved little by little and paid down debt the same way. It doesn't happen overnight, but it does happen.

Otherwise, what's your choice? Working until your 80s, or retiring into poverty?

It's time to get started.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is a Certified Financial Planner professional and founder of Four Ponds Financial Planning LLC (www.fourpondsfinancial.com) in Falmouth and Mansfield, Mass. Contact McPherson at david@fourpondsfinancial.com