The Golden Fears

EVERY SEVEN SECONDS FOR THE next 16 years, another baby boomer will turn 50. And with almost the same frequency, someone, somewhere, will release another study telling us how woefully unprepared we are for the high future cost of retirement.

Merrill Lynch weighs in annually with its version of bleakness. The latest: boomers are saving only 38 cents for every retirement dollar they'll need. Researchers at the Wharton School have just told today's pre-retirees they must save 16 percent of their incomes between now and the age of 62 to make it through their golden years. Earlier this month an industry coalition called in the cameras to release a new Retirement Confidence Survey. Seeded with phrases like ""dismal planning'' and ""naively unprepared,'' it portrayed a population clueless about how much it's going to take to walk away from work.

Enough already! We're scared, OK? But we should point out one thing: what these studies have in common, aside from their ability to paralyze midlifers with their work-till-you're-80-and-then-eat-pet-food scenarios, is who's paying for them. They are almost all funded by the brokerage and mutual-fund houses that stand to cash in on the great retirement panic, or by employers only too happy to watch their workers take more responsibility for their own futures.

They have something else in common, too. These studies often ignore or underplay some of the good news--those mitigating factors that seem to show a generation that will basically be OK, or muddle through at least as well as their parents have. Even Olivia Mitchell, the industry-funded Wharton professor whose research has led her to support a privatized Social Security system, concedes, ""It seems clear that the baby-boom cohort is not experiencing the dramatic saving shortfall that some doom managers have portended.''

In fact, baby boomers are not the spendthrifts they've been made out to be: year for year and dollar for dollar, they have saved more than their parents did and at younger ages, according to a Congressional Budget Office study. ""They are in better shape than their parents or grandparents were, they are far more likely to have some type of accumulation in a retirement plan, far more likely to have done savings on their own and far more cognizant of the need to be saving,'' reports Dallas Salisbury, president of the Employee Benefit Research Institute.

There are other factors that these studies conveniently overlook. The Merrill Lynch study consistently ignores home equity on the theory that you have to live somewhere, even when you're retired, despite the fact that many retirees end up selling their homes or taking money out with reverse mortgages. (Asked to comment on its finding, Merrill Lynch referred NEWSWEEK to Stanford University professor B. Douglas Bernheim, who prepared the Merrill Lynch study. He couldn't be reached, but he has said he believes his research rests on optimistic assumptions.) Most of the studies, including Mitchell's, assume that retirees will retain their current lifestyles, but that's a false assumption. Even if you don't reap immediate rewards the day you stop buying business suits, bus tokens and cookies from your colleagues' kids, you're likely to reduce expenses later in retirement by trading down to a smaller home, moving to a less expensive area, living a little less large and taking advantage of those great senior-citizens discounts.

Taxes, too, are often inaccurately considered in these retirement-planning exercises. The reason is that retirees register high marginal tax rates when they hit income levels high enough to have the bulk of their Social Security benefits taxed (roughly $34,000 for singles, $44,000 for joint filers). But their average tax rates are still significantly lower than for workers at the same income levels. When T. Rowe Price, the Baltimore mutual-fund company and 401(k) powerhouse, updated its retirement-planning software to more accurately reflect the low average tax rates of retirees, its estimate for what a 45-year-old needed to save annually dropped from $11,450 a year to $5,100.

Then there's that $10.4 trillion inheritance that Cornell University experts reckon the baby boom will collect, which appears nowhere in these studies. Even though it won't be evenly spread, it's got to go somewhere. These scare-you-into-savings studies also tend to ignore the number of families that will have two pensions rather than one, the extra year most boomers will work and save as Social Security's normal retirement age ratchets up to 66, the greater ability of boomers to save because they have had fewer children than their parents and the propensity of most workers to save more in their retirement-approaching 50s and 60s than they did in their home- and family-building 20s and 30s.

So, does all this mean that you can stop saving? No, you'll still have to contend with the likelihood of less generous Social Security and Medicare benefits and less of a home-sale bonanza than your parents reaped. But you probably can stop worrying so much. You'll do OK as long as you keep stashing cash and make sure your money is working as hard as you are. Here's how to capitalize on the latest developments in the retirement market without falling into any panic traps.

Comparison-Shop: The 401(k) market has become a competitive jungle, and if your company already has a plan, there's a good chance your boss is being constantly solicited to switch, reports David Wray of the Profit Sharing/401(k) Council, a Chicago trade group of plan-offering employers. Make the most of it by pushing for the best possible program. Today that means at least five investment choices, including domestic and international stock funds, voice-response and Internet access to your account, the ability to borrow on your own money and an employer match of at least 2.5 percent of your salary. Watch that match: Wray's data show employer contributions falling a bit compared with last year's.

And don't underestimate the willingness of your employer to change plans if you whine loudly enough. David Huntley, whose 401(k) Provider Directory helps companies find plans, says he's seen companies shift on the strength of complaints from four or five workers.

Watch Your Fees: Despite the competition, those 401(k) plans don't come cheap, and the smaller your employer, the more you and your boss may be paying in hidden fees--as much as $28 for every $1,000 in plan assets, says Huntley. The Labor Department has taken notice and will hold hearings on these fees early next month. ""Employers and employees may not be receiving adequate information about the fees charged to their 401(k) plans,'' said Assistant Secretary Olena Berg, who may have plans to require additional disclosure. Most companies cover record-keeping costs and expect employees to pick up the investment expenses themselves. Find out if your plan charges you to switch in and out of investment funds or offers choices of cheaper funds, and act accordingly.

Limit Company Stock: Too many eggs in one basket remains a problem at many firms that offer company stock to their 401(k) participants. At one in six such firms, company stock makes up more than half of its plan's assets. If that's what your portfolio looks like, remember that if your company falls on hard times, you could watch your portfolio and your career tank at the same time.

Last summer's tax bill took a weak stab at limiting the amount of company stock that an employer can force you to buy with your own contributions, but did nothing to stop employers from paying their whole match in shares. If your company does this, at least find out if you can sell it periodically to redistribute the wealth.

Resist the Early-Withdrawal Urge: Washington keeps making it easier for you to liquidate your retirement account, but that doesn't mean you should. New rules allow you to avoid early-withdrawal penalties on IRAs if you use the money for tuition or a first-time home payment. Don't do it! Money that comes out of an IRA can never be put back, and $5,000 that you take out of the account now means $34,500 that won't be there in 25 years. In most cases, you're better off borrowing money for those other purposes and holding tight to your IRA.

Borrowing against your 401(k) account is another story. You can replenish your 401(k), and the interest you pay on the loan goes into your own account. Instead of paying 8 percent or more to a bank, why not pay it to yourself? You know you're good for it. If you doubt your ability to repay the money or if you're thinking about changing jobs, don't take out a 401(k) loan. You may be pressed to come up with more cash than you can in a hurry.

Live Lean, Max Out: Only about half of 401(k)-eligible employees even contribute enough every year to get their full employer match, but there's no easier way to make money. Do what it takes to feed every tax-favored retirement account you have as much as possible, and that includes the new improved Roth IRAs that will kick in next year. EBRI's Salisbury exhorts boomers to save on life's little luxuries, too. Invest the price of one double large latte every week for 40 years and end up with an additional $450,000, he reckons. Enough, perhaps, to buy a Starbucks franchise for that second career those studies say you'll be starting when you're 80.