Now that we have established where we are financially, the next question is: "are we saving enough?"
If we look at our parents and grand parents today people complain and say that our past generations had security. They had government or company pensions and with the introduction of the 401-k the American companies our abandoning us and our future. If we however look at history the difference is that when someone was hired in the old days by governments or often corporations and were blessed to have a old fashioned defined benefit plan. They were mandated to contribute on average 7.5% of their salary to the plan from the day they were hired. The only difference between the good old days and today is mostly freedom and the discipline that one needs to take to plan and save on a voluntary basis rather than as a condition of employment. Think about social security -- the biggest threat to its long term future is not the fear of employee savings accounts but rather the control that people will have that will upset their long term security.
So are you saving enough? For a quick ball-park estimate, look at the table below to see how much you need to save regularly to accumulate $1 million. Keep in mind, few families have enough cash to save for all their goals at the same time. So make retirement your first priority and max out on your 401(k) and IRAs--over the long term, these tax-deferred plans are great savings accounts but not the place to accumulate wealth. As your income grows, you can target other goals such as buying a house or saving for your kids' college bills.
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HOW LONG BEFORE YOU REACH $1 MILLION? If you want to accumulate $1 million by the time you retire, here are how many years it will take, assuming different monthly savings levels and rates of return, including the 10% historical average annual return for stocks. (See Chapter 8 to understand the problem with averages)
MONTHLY RATE OF RETURN
SAVINGS 4% 6% 8% 10%
$100 90 67 54 46
$500 52 41 34 30
$750 43 35 29 26
$1,000 37 30 26 23
$1,500 30 25 22 19
$2,000 25 21 19 17
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Are your debt and spending levels under control? If you decide that you need to clamp down on your spending, don't become obsessed with making a budget--few people can stick to one. Instead, first make sure you put money toward your long-term savings goals each month. Then, each time you contemplate an expenditure, ask yourself, “Is this purchase going to enhance my net worth?” Once you're in that wealth-building mindset, you'll find that you spend less automatically.
Remember, in the end how well you're doing comes down to what you're doing. If you need more encouragement, consider this: Overall, the baby-boom generation has accumulated larger net worth--including their homes and financial assets--than their parents had at similar ages. That's largely because baby boomers have been more active investors in the stock market than their parents were; boomers have also enjoyed unprecedented economic prosperity. Assuming real wage growth, boomers will likely have more wealth than their parents in retirement. Many may even continue to accumulate wealth into retirement. The past few years have delivered a clear lesson on the way to build wealth: If you come up with a financial plan and stick with it, you'll end up ahead.