You gotta be committed

by Don Kuehn

It would seem logical that one of the best predictors of a person's ability to save for retirement would be lifetime earnings, i.e., how much you earn cumulatively over your career. It is often one of many arguments your union makes at the bargaining table during salary negotiations.

A recent National Bureau of Economic Research study by Steven Venti, of Dartmouth College, and David Wise, of Harvard, found that lifetime earnings are not a very good predictor of retirement wealth. They found that families with relatively low lifetime earnings were still able to accumulate significantly large investment portfolios.

At the same time, families with what most would consider relatively large incomes had little to show for it when they entered retirement.

Why the paradox? It seems as simple as making a commitment to saving.

Many of us at the crest of the baby boom wave (now in our mid-fifties) are the 'beneficiaries' of the pecuniary habits of our parents. They were children of the Depression, witnessed 'bank holidays' that wiped out life savings, endured the Dust Bowl and fought the 'war to end all wars.' They survived the uncertainty of economic times and earned for many years what in today's terms might be considered paltry wages or salaries. Perhaps because of those tenuous times, they were, ah...should we say, conservative in their spending and savings habits.

But that, according to Venti and Wise, is the key to wealth building. Most of the discrepancy in wealth at retirement is directly attributable not to lifetime income but to family decisions on how much to save. Although there can be many intervening factors, such as inheritances, windfalls and unpredictable setbacks, a commitment to a savings plan is the best barometer of retirement wealth. As the old saying goes: It's not how much you make that counts, it's how much you keep.

Today we are lucky to have the Internet, discount brokers and mutual funds to help build our investment portfolios. Even though the government continues to report a declining savings rate among Americans--the lowest since the government began keeping records in 1959--other measures, such as the Investment Company Institute's recent report, belie those numbers. That report indicated that more than 5 million new stakeholders were added to the mutual fund universe in the past year. Five million!

Today, 88 million Americans own mutual funds--almost half of all households. That's nearly nine times the number of households owning funds in 1980.

People of all incomes are among those who have taken the initiative to invest. In the last two years, the percentage of mutual fund households with annual incomes between $25,000 and $35,000 grew by one-third.

About a third of all homes with incomes under $50,000 have a stake in funds. Almost 60 percent of the households occupied by the 45-to 54-year-old age group are mutual fund investors. That's an increase of 11 percent in just two years. People are catching on.

The record run in the equity markets in the past five years is, no doubt, a tremendous catalyst to this investment rate. But I can't help but believe that the legacy of our Depression-era parents or grandparents is also a big part. Savings is a habit, a commitment, a way of life.

Does that mean that life becomes a no-frills affair? No color, just gray? Absolutely not. If there were no joy in saving money, whether for short-term goals or for longer-term reasons such as college or retirement, we wouldn't see explosive growth in the number of new investors.

The key is to find a balance between your champagne taste and your beer budget, between living on credit you can't afford and saving even small amounts on a regular basis.

Simplify your finances. Develop an asset allocation that mixes stock, bond and money market mutual funds What's the right mix? Sorry, can't help you.

It depends on your goals, time frame and your tolerance for risk. This much I can tell you: As I prepare my portfolio for the day (not too far off) when I lay down my tools and retire, the reality of striking just the right balance between inflation-fighting equities (stocks) and income-producing bonds and money funds is a tough pill to swallow.

For all of my investing life I have considered myself a fairly aggressive investor. The catch, however, is that now it's becoming necessary to consider other factors such as life expectancy, future income needs and lifestyle considerations. It's time for me to abandon the aggressive approach and get real about where living expenses are going to come from.

At the end of each of these articles is a disclaimer that advises readers to consult competent legal, tax and financial counsel. Well, that's just what I have done. In my next column, I'll share some of what I learned from my dealings with a fee-only financial planner.