So what do you do if you're 54?
President Bush pledged in his State of the Union speech Wednesday not to reduce Social Security benefits for workers 55 and older. And for the better part of a century, Americans have been able to look forward to a government-guaranteed retirement income.
But the system is running short of money, and it is likely that guaranteed benefits will be reduced for those 54 and younger if some form of the president's plan is enacted. Workers would be invited to put some of their payroll tax money into investment accounts designed to produce retirement income. But their value would depend on the success or failure of the underlying assets.
Protesters in San Francisco demand that Charles Schwab Corp. drop its support of President Bush's proposals to reform Social Security.
(Eric Risberg -- AP)
So You're Under 55... A sample of how much you would increase your nest egg by investing $1,000 annually in a diversified portfolio of stocks and bonds.
Today, a worker can write the Social Security Administration and get a fairly accurate projection of future benefits, said Barry Glassman, of Cassaday & Co., a McLean financial planning and investment management company. It can be summed up on two pages, "here's all your income for all the years, here's what you get when you retire," he said.
With personal accounts, "what can they possibly send us that says, 'here's what you going to get'? It could be 30 pages of what-ifs," he said.
The solution for the already middle-aged is clear to experts. "These people need to save more," Glassman said. And the advice "is the same stuff people should be doing anyway."
First, those who have 401(k) plans at work could invest more -- at least enough to qualify for any matching contribution from the employers. In fact, workers can contribute up to $14,000 to their plans this year, plus another $4,000 if they are 50 or older. Next year, the figures will be $15,000 and $5,000.
Of course, only about half of American workers have employer-sponsored retirement plans at all. And about a quarter of those workers who are eligible for 401(k) plans don't participate.
And advisors always recommend making sure that the money is going into appropriate investments. For instance, younger workers can go mostly into stocks because they have the best long-term returns, and there is time to recover if the market tanks.
Second, workers who make the maximum donations to their 401(k) can invest an additional $4,000 ($4,500 for those over 50) in an individual retirement account. For many, the contribution will be deductible. And those not eligible to deduct a traditional IRA may be able to use the Roth IRA, which is not tax deductible going in, but is tax-free when withdrawn in retirement.
Those interested in more security can consider buying a private annuity. Annuities are sold by insurance companies, and come in many varieties. In general, they can be structured to pay a stream of income that the company guarantees will last for the owner's lifetime, or the owner's and his or her spouse's, or for some specific period of years.
"We've been seeing increased interest in income annuities," reflecting increased concern about retirement income, said Drew Denning of the Principal Financial Group, an insurance and financial services company.
For younger workers, a personal account, invested successfully over four decades or more, could add up to a reasonable sum. For example, $1,000 a year, invested in a balanced portfolio of stocks and bonds that earned a real (after-inflation) average annual return of 4.6 percent, would provide a worker with more than $109,000 to start retirement. The total would be higher if, as Bush apparently envisions, the amount invested rose by $100 a year.
Whether that, along with the minimum benefit that apparently would remain guaranteed by the system, would provide real retirement security is a matter of debate.
Another factor for older workers to consider is that while 10 to 15 years is normally considered a reasonable time horizon for investing in stock, that assumes the person puts all the money in at the beginning. This gives the money time to ride out periodic market slumps.
With private accounts, workers would put the money in over a period of years, in effect dollar-cost averaging. Such averaging, in which you put the same amount into the market at regular intervals, buying more shares when prices are low, fewer when they are high, is normally regarded as a way to reduce risk. But for older people, it means that time is compressed -- the money put in at age 55 has 10 to 12 years in the market, but the money put in after age 60 has less time to grow.