Take steps now to help build a retirement nest egg
— -- Q: I can only afford to invest $100 a month for retirement. How poor will I be when I'm 65 years old (I'm 40 years old now)?
A: Financial planners love to scare people into thinking they're not saving enough money for retirement. And they're usually right.
But many investors who aren't saving enough probably aren't neglecting this important responsibly on purpose. Most investors understand the importance of saving for retirement and would like to save more. But the constraints of financial obligations, like rent, the mortgage and other bills, consume a growing percentage of most peoples' take-home pay. After all the bills, there's often little left for saving for retirement.
Clearly, it's important for investors to understand how much they'll need in retirement and try to save enough. With the future of Social Security becoming murkier every year, it's clear that most of the burden of paying for retirement is being shifted to the individual.
It's wise to be realistic, too, though. In your question, you say you can only afford to save $100 a month for retirement. And, you're right, that's not much and probably wouldn't be nearly enough for most workers who lack a healthy pension plan or other defined benefit plan to live on for long during retirement.
If you're only able to save $100 a month, it's a good idea to understand what that will leave you with when it's time to retire. Knowing what the finish line will look like, before you get there, is a good idea so you can at least be prepared.
Using forecasting tools, we can get a pretty good idea of how much you'll have in 20 years by saving $100 a month. Based on the data you provided, and a moderately aggressive investment allocation that calls for 80% stocks and 20% bonds, you will have $78,491 in your retirement account when you're 65 years old, based on an analysis of data from IFA.com's Retirement Analyzer. The results are based on market returns that are in the mid-point of the best-case and worst-case expected scenarios for stock and bond market returns.
If $78,491 doesn't sound like much at retirement, you're right. Based on a prudent withdrawal schedule, you couldn't afford to take more than $3,966 in income during your first year of retirement, based on the IFA.com Retirement Analyzer. It's going to be difficult for most people to live on that, even if you get income from Social Security.
Now that you know what the future will look like, it's time for you to deal with it. If you're planning to retire comfortably, you must find ways to turbo charge your level of saving for retirement investments. This might require making sacrifices in spending now or finding ways to boost your income. Alternatively, you might want to start planning ways to drastically lower how much money you'll need in retirement.
Don't lose heart. The numbers are alarming to be sure. But by understanding what the future holds, you can make moves now to make the situation better.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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