Solid advice on saving to retire

Impulse spending, social pressure, small incomes, large expenses.

Those are the excuses that have 52 percent of Americans saying they are saving “inadequately” for important goals such as retirement.

The survey, released recently by Wachovia and the Consumer Federation of America, also asked more than 2,000 respondents about young people’s chances of accumulating $1 million.

Just 10 percent of young Americans are likely to amass a cool $1 million, according to the survey.

You’d better prove them wrong.

Punch out a rough calculation on any retirement planner and you’ll find $1 million doesn’t come close to how much most of us will need for a three-decade vacation.

In its own sobering study, presented to Congress recently, the Government Accountability Office predicts that the average worker born in 1990 will have only enough saved in a 401(k)-type plan to replace 22 percent of his or her yearly income.

A little more than a third won’t have any money saved in such a plan. Most financial advisers suggest that clients have at least three-quarters of their pre-retirement income to maintain the same standard of living.

I doubt many future retirees are relying solely on 401(k)s. Pensions, although less common, still exist.

Tapping home equity, or downsizing, also are retirement-income options for many. And there’s Social Security, which should replace an estimated 30 percent to 49 percent of a worker’s income — even in 2055, according to the program’s trustees.

But as we all know, there’s some uncertainty about what Social Security will look like by the time my generation is living on Golden Pond. And to borrow economist Jared Bernstein’s term, we’re living in a YOYO economy (you’re on your own).

So how do we save more than $1 million?

Stop the leaks. The GAO found that of the 21 percent of households that had received a lump-sum 401(k) distribution from a previous job, nearly half cashed out the funds for another use. Stop that leakage and retirement income would rise by about 11 percent.

Taking out loans from 401(k)s represents another savings culprit. Even though you pay the money back with interest, you may have lost out on higher returns. And you’re paying yourself back with after-tax dollars.

Bank your raise. Keeping your pay increases off limits is a tough but effective way to bulk up savings, said Jon Govin, a certified financial planner with LOTTSA Financial Services in Minneapolis. Govin blames it on “lifestyle creep” — the tendency for our expenses to grow steadily with our income.

“You start out graduating from college and eating ramen noodles and then you get a job and start buying things,” he said.

Think security, not style. “I’m happier not because I bought something but because I don’t have to worry so much [about retirement],” said Richard Todd about his own savings habits.

Todd, an economist at the Federal Reserve Bank of Minneapolis, added: “Choosing just a little bit less and having a little more cushion — to me, that trade-off is worth it.”

Face the numbers. Before you get too depressed, take heart in this statistic from Wayzata certified financial planner Rick Epple.

Start saving $3,000 per year earning 6 percent at age 45 and you’ll sock away $60,000 and have about $120,000 to show for it at age 65.

Begin with the same amount at age 20 and you’ll have about $700,000 in 45 years. Yes, you invest $75,000 more in the second example, but look at the bang for your extra bucks.

Epple says that without a look at the numbers, “it really is such a hard point to get across.”

XKara McGuire writes about personal finance. Write to her at karastartribune.com or at the Star Tribune, 425 Portland Ave., Minneapolis, Minn. 55488.