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Next generation can retire-with planning
If you joined the workforce in the past 10 years, you've probably heard a lot of doom and gloom about your retirement outlook.
If you joined the workforce in the past 10 years, you've probably heard a lot of doom and gloom about your retirement outlook. Most of you won't have generous retirement benefits, including traditional pensions and retiree health insurance. Those of you born in 1960 or later must wait an extra year—until age 67—to claim your full amount of Social Security. Those who claim at the same age their parents did will get less. But there are ways for thirtysomething associates to retire comfortably.
Know the goal
Most investment gurus suggest members of Generation X shoot for a retirement savings goal of at least $2 million, according to Michael Farr, author of A Million Is Not Enough: How to Retire With the Money You'll Need. But Farr cautions that most people with high incomes and the ability to set aside $2 million will likely have more expensive lifestyles. Other studies have found that young people may be able to get by on less in retirement. Human resources consulting firm Aon Hewitt calculated that Generation Y workers, who it defines as those ages 18 to 30, will need about 19 times their final pay for retirement, including Social Security, traditional pension plans and personal savings, to maintain their current standard of living at age 65. For someone whose final salary is $75,000, that's just over $1.4 million, and Social Security will provide part of that. For Generation Xers ages 31 to 45, Aon Hewitt estimates they will need about 16 times their final salary to pay for retirement. A higher earner will probably continue to spend more in retirement.
How to get to the magic number
Saving $2 million will take effort, even if you start early. A 25-year-old needs to save about $7,405 annually, or $142 per week, to get there in 40 years, assuming an 8 percent annual returns. Retirement account contributions from your employer will make it much easier to hit your retirement savings goal. If the veterinary practice can match your 401(k) contributions with $2,000 per year, you'll only need to save $104 per week to have $2 million by age 65, again assuming an 8 percent annual return.
Minimizing investment fees and expenses will help grow your nest egg. That's because high expense ratios on mutual funds can have serious drag on your long-term returns. Getting a 7 percent annual return instead of 8 percent over a 40-year career—because you're paying 1 percent in yearly fees—means you will need to save $2,255 more per year to still hit $2 million by age 65. Index funds generally charge much less in annual fees than actively managed mutual funds.
Roth 401(k)s and IRAs allow young colleagues who are likely to be in a low tax bracket to pre-pay taxes on their retirement savings. Newer graduates are in a lower tax bracket now than they will be in the future, including when they begin to tap into their retirement savings. You're giving up the current tax deduction, but you are basically getting tax-free retirement income that would otherwise be taxable in the future. Once your contribution is made with after-tax dollars, that money can continue to grow for the rest of your life without the drag of taxes. If you wait until age 59½ to withdraw the money, you won't have to pay taxes on any of the growth.
Understanding Social Security
Social Security provides a base income that your retirement savings can build upon. Take steps to maximize the amount you get by making sure you have at least 35 years of earnings under your belt before you sign up for payments. And carefully consider the age at which you begin to claim benefits. Payouts increase for each year of delayed claiming between ages 62 and 70.
A male veterinarian, born in 1946 can expect to live 18 years after retirement at age 66, according to Social Security Administration projections. Men born in 1980 should plan for at least 19.3 years of retirement after the higher retirement age of 67. For women, the average projected length of retirement jumps from 20 years for those born in 1946 to 21.2 years for those born in 1980. And these are just the averages.
Of course, you don't have to retire at age 65 or at what the Social Security Administration defines as the full retirement age: 66 for most Baby Boomers and 67 for younger people. Working a few extra years gives you more time to save, allows your investments a longer time to compound, and reduces the number of retirement years your savings must finance. If you're 25 now and willing to work until age 70, you could reach $2 million by saving just $95 per week, assuming an 8 percent annual return and not even counting the 401(k) match.
How much you need to save depends on your expenses. If you're willing to pay off your mortgage before you retire, move to a smaller house or low-cost area and live a modest lifestyle, you may get by on less. However, if you must have an upscale retirement you'll need to save more.
No generation has had it easy. Your parents and grandparents struggled, just as you will. But the rule still is: prior planning prevents poor performance. This economy will make it even harder to retire, but as a famous comedian once said, "If you want a fancy funeral, plan for a cheap wedding." Don't be like many of the Baby Boomers who have unsellable veterinary practices and drop dead over the exam table at age 88.
Dr. Snyder, a well-known consultant, publishes Veterinary Productivity, a newsletter for practice productivity. He can be reached at 112 Harmon Cove Towers Secaucus, NJ 07094; (800) 292-7995; Vethelp@comcast.net; fax: (866) 908-6986.
For a complete list of articles by Dr. Snyder, visit dvm360.com/snyder