Save - Don't Spend - This Holiday Season
December 7, 2002

No one likes to play Grinch during a time of celebration and gift giving, but I'll take on the role to talk about saving for retirement. Our income during retirement comes from three main sources: pensions, Social Security, and personal savings. I'm cautious about the outlook for the first two. Workers will need to focus on boosting their personal savings to preserve their current standard of living in their Golden Years.

Let's hone in on pensions first. In the '90s, workers hoped that double-digit equity returns in their 401(k), individual retirement accounts, and similar pension plans would fund a comfortable old age. Who didn't see this calculation or a comparable one: $1,000 invested in stocks over the past half century is worth $212,000 today. That stunning 11.3 percent average annual return left all other main investment options far behind in the performance sweepstakes. Of course, the dream of easy money vaporized after a nearly three yearlong bear market decimated retirement funds.

Yet the pension savings problem runs far deeper than the manic moods of the market. Take that 11.3 percent average annual return. In the real world, investors don't pocket anywhere near the sums generated by the market's performance. John Bogle, the founder of the Vanguard Group, calculates that after taking into account inflation, expenses, and taxes over the past half-century, $212,000 shrinks in value to a real $4,300. That's right, $4,300.

Depressed? Well, it's also likely that stocks won't record anywhere near an 11.3 percent return for some time. A four to nine percent return range is a far more reasonable expectation given the current dividend yield and earnings growth prospects.

Now, let's look at Social Security, America's bedrock retirement plan. The scare stories about the system crumbling under the weight of an aging population are hokum. But the system is under financial pressure and benefits are likely to be trimmed over time.

It's up to personal savings to take up the slack. Savings through residential real estate is on the rise with a record two-thirds of American households owning their own home. But households still need to set aside more money every year than they're currently doing. That means budgeting to spend less and save more. So, enjoy the holidays—but frugally.

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