The Case for Maximum IRA, Mar 04 | Save Now for Retirement


Every yearat this time, I put a noteon my calendar to writeabout the importance ofcontributing to IRAs, RothIRAs, SEP IRAs, and pensionplans. This is so you canpossibly take a deductionon your tax bill and haveenough money to live onafter you retire.

The sooner you contribute,the more compounding youcould experience.

Consult all thegovernment rules on makingIRA contributions or seeyour friendly neighborhoodtax advisor about doingwhat is right for you.

But are you making thosecontributions? For mostof you, I suspect the answeris no! My colleague at BDFInvestments, Ken Wall, recentlyshowed me statistics fromthe U.S. Commerce Department’sBureau of Economic Analysisthat are disturbing.

The personal savings rateas a percent of disposable,after-tax income has droppedfrom about 9 percent inthe 1970s and mid-1980sto 1 percent for 2004, lessthan the savings rate inmany other major nations.

The report states: “Babyboomers are fast approachingretirement with limitedfinancial resources. SocialSecurity faces insolvencyand cannot pick up the slack. . . . [T]otal privatesaving has declined as ashare of gross nationalproduct (GNP).

“The dearth of savinghas restricted investment,considerably retarding thegrowth of productivity,wages, and employment, andslowing the growth of individualincome and wealth.”

Now, I admit I am not simon-purewhen it comes to savingfor retirement. I startedputting my four childrenthrough college in 1984,and I did not finish thejob until 1993. I had threein college two years ina row, so I am a littlelight, if not negligent,in contributions for thoseyears.

Still, I am glad I putthem through college. Theyenjoyed the experience.Now, it is incumbent uponme to support myself inretirement, which shouldmake them happy. After all,they will probably choosemy nursing home.

So, now I am making upfor lost opportunities andcontributing the maximumto every retirement vehicleI can. Why? Well, let’stake a closer look.

Some 76 million baby boomers,those people born between1946 and 1962 (about 29percent of the U.S. population),will begin retiring, someas early as this year whenthe first ones turn 59-1/2and can start taking moneyfrom their IRAs.

Because people are livinglonger, Social Securityis projected to pay babyboomers until the middleof this century, when mostof them should have diedoff. In the meantime, payingthem will put a severe strainon Social Security. Thesystem may start runningout of money in 20 to 30years, unless Congress decidesto do something about thesituation.

Given President Bush’srecent State of the Unionaddress and those lobbyistsfrom AARP, that solutionis highly likely.

Let’s look at thesituation from a differentangle: Social Security currentlypays a retiree with fullbenefits $1,000 to $1,900a month. Now, look at yourbudget and your credit cardstatement. Can you honestlysay you can live on $1,000to $1,900 a month?

The honest answer for mostof us is no! In fact, SocialSecurity never was designedto provide a retiree witheverything, but with 40percent of one’s needs.Experts estimate that retireescan live on 70 to 80 percentof the income they earnedwhile working. That leavesquite a gap. Will your pensioncover it? That depends onhow much you earned andput away for retirement.

An IRA could just be yourmargin of safety. So, asthe Nike commercials say, “Justdo it!” Then, if yourexperience is anything likemine, you can open yourstatements, watch your investmentsslowly grow, and feel goodabout what you have donefor yourself.