Cramer: How Much to Save for Retirement Now


I’ve been meaning to focus more on long-term financial strategies in this column, and that's going to mean more discussions and advice on retirement tools like IRAs, mutual funds and stocks.

No worries—that’s a good thing.

It’s funny, though. I’m known for the stock picks I make on Mad Money, but I have a long history of telling people to take a careful approach to their retirement investments. I’ve also been out on the stump telling people that a cautious stance could minimize, or possibly even eliminate, some of the damage done by a stock market collapse like the one we saw in 2008 (when some investors saw up to half of their retirement portfolios wiped out).

This was long before things went south for the economy and the stock market. In my book Stay Mad For Life, I point out early, on page 14, that when it comes to retirement funds, you can’t afford to take a big loss. "If your portfolio declines by 50%," I wrote, “you will need to gain 100% (in your portfolio) to get back to where you started.”

In the book, I also talked a lot about capital preservation, which simply means keeping the money you’ve already made in the financial markets. Call me Nostradamus, but in that same book, and on that same page, I used the springboard of capital preservation to warn Americans not to take on too much risk with their retirement funds, and that although it might be boring, an emphasis on capital preservation is a smart move when your financial future is on the line:

“Devoting your retirement to capital preservation means taking on less risk and pursuing substantially smaller returns. It can be frustrating to own a bunch of U.S. Treasury bonds that yield only five percent annually (and which are yielding much lower now). This ultraconservative path may seem like an agonizingly slow way to make money, but it’s also an incredibly safe way to make sure your capital at least keep pace with inflation. Again, you do not want and cannot afford to lose your retirement savings. People who disregard this warning get into serious trouble.”

I wrote those words years in 2006, well before the economic collapse of 2008. I’m not looking for any credit or big pat on the back, but I do want to reiterate that safety is still a big key for millions of Americans who face the unenviable chore of rebuilding their retirement portfolios after the “perfect storm” of 2008.

So that’s why I’m going to be taking more time to help people dig out of their retirement mess and put them back on the road to stability. Let’s start today with Job One—making sure you have recalculated how much money you are going to need for retirement, especially in light of the losses so many people have suffered in their 401(k)s and IRAs.

After all, none of us can see into the future, but we can agree on some basic, sound financial principles and guidelines.  It's not enough to simply say, "I'm saving." You need a plan that includes specific targets and goals. That starts with a snapshot of where you are now, and what kind of ground you have to make up to still retire in relative comfort.

There are no guarantees, but with a little planning, and road map leading the way, a good retirement doesn’t have to be a pipedream.

Step One: Start with your current age and figure out when you plan to retire. If you planned to retire at age 62, but lost big money in the economic downturn, you may have to readjust. The key is to focus on a realistic timeline to retirement. And remember, we’re living longer, too. If you turn 65 today, you can expect to live until age 83. What’s more, the fastest growing segment of the population is those 85 years old and up. So you’ll have more time than you think—and more time to make up on lost retirement portfolio income. To get going, visit our partner site, the invaluable, where you’ll find a retirement planning calculator that takes your age, estimated retirement age, income, savings accumulated, and other key factors and shows you where you can expect to be in retirement.

Step Two: Recalculate your income. If you’ve lost your job or taken a pay cut, or you own a small business where revenues have slackened, you’ll need to take another look at both your current income and the amount of income you'll need to live comfortably during retirement. Try to factor in any forms of income you expect to draw upon in your retirement, such as Social Security, pensions, or other annuities. By and large, focus on maximizing your savings rate and take advantage of tax-deferred savings plans like IRAs and 401(k)s. More specifically, setting aside 10% to 15% or more of your gross income is a good target, especially the closer you draw to retirement. If your employer matches your contributions, take that into account. For help on calculating income factors, visit BankingMyWay's retirement income calculator. It will show you how much income you’ll need to live on in retirement, based on how much income and savings you have today—and can put away tomorrow.

Step Three: What is your retirement fund balance today?  I know, checking up on your retirement fund balance is no walk on the beach. It’s more like walking the plank. But still, you’ve got to do it. If you need to make up for lost time—and lost portfolio profits—now's the time to amp up your savings rate by increasing your monthly contributions. Again, not easy. I know. But it’s still doable. To stash more money away, start poking around at work. Is there an employer contribution option you can take more full advantage of? Or if you've maxed our your potential through work, can you start a separate, Roth-type IRA?  Make sure to figure out where your current retirement savings are invested (that’s known as asset allocation—a primer for another day). If you've got years to keep saving and time is on your side, you can afford to be more aggressive in your investments, placing your bets on a higher return.  As your situation changes—you get a new job, raise, or bonus—aim to increase the amount you are saving. You know, there’s no law that says you have to spend a bonus or an inheritance. Either use it to pay off debt or stash it away for your retirement. Watching money grow is one of my favorite past times and I guarantee you’ll feel the same way once you get started.

One other note: If you're uneasy about making investment decisions based on your age, goals, income and current retirement numbers, many retirement plans now have “age-targeted” funds, which incorporate the facts about you (your age and personal risk tolerance, among them) to development a personalized plan that automatically adjusts for your specific financial situation over time.

By using your age, your income, your estimated age of retirement and your current retirement account value, you can get a spot-on look at how much money you’ll need to save for retirement.

Look, a lot of us are in a state of shock over what’s happened to our investment portfolios. Facing the music ain’t easy, but at least we can make the process easier. So follow the steps above and let Cramer lead the way. As I said above, I’ll have lots more to say about the new retirement planning landscape in the weeks and months ahead—it’s all good stuff and I know it can help.

Right now, we can use all the help we can get.

For a good take on how other Americans are handling the new realities of retirement, visit our retirement planning channel. There, you’ll find loads of investment and retirement planning advice, and can even see how other folks are dealing with their now readjusted financial futures.

Also, for more direct help on your retirement plan, send along your questions to editors [AT] mainstreet [DOT] com. We’ll try to get to every question we can.

—Brian O’Connell contributed to this article.



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