NEW YORK (Money Magazine) -
Take a quick look at the balance sheet of Kevin Prior, a 29-year-old C.P.A. living in San Francisco, and you get a picture of a young man who's got his financial act together.
He earns $6,000 a month and spends little -- $850 on rent, $200 on credit cards. His car costs $302 a month, but he paid it off three months ago. Prior credits his simple lifestyle for the fact that he's been able to max out his 401(k) contributions since the day he was eligible for the plan.
"Remember I'm a single guy," he says. "The only things I spend my money on are beer and skiing. So I've been able to raise my contribution in proportion to my raises."
In other words, Prior ripped a page from the MONEY playbook and took it to heart. Distressingly, some new research shows that even folks like him -- who do everything right from the beginning -- may not have enough for a comfortable retirement.
Andrew Huddart, CEO of mPower.com, which provides online retirement advice, took a look at a hypothetical 24-year-old with an annual salary of $35,000 who makes sizable 10 percent 401(k) contributions every year.
Huddart assumed inflation of 3 percent, annual salary increases of 6 percent, and investment returns of 8 percent during the working years and 5 percent post-retirement.
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The ride up for our 24-year-old looks incredibly promising. By his 30th birthday, he's earning $47,000 and has nearly $30,000 in his 401(k). At 44, he gets a six-figure salary for the first time and has a quarter of a million in his account. At 50, he earns $150,000 and has racked up a cool half-million. And by the time he is 59 1/2, his balance hits $1.24 million.
Which sounds, well, it sounds terrific.
Until you dig a little deeper into the numbers. Most people, Huddart's work has shown, need about 70 percent of their final pay going into retirement to maintain their lifestyle. In this case, that's $177,650 a year.
Assuming our guy gets the maximum Social Security payment of $45,000 a year ($10,800 in today's dollars), he'll still have to draw $132,650 a year from his retirement stash. At that rate, the well runs dry around his 69th birthday.
Yikes!
Widespread problem
The most frightening thing is this: By the time he reaches retirement, our hypothetical saver will have 10 times the retirement assets that most retirees have today. According to the Employee Benefits Research Institute, the average person in his or her sixties had a 401(k) balance of $105,822 at the end of 2001 (the latest available data).
Back to our 24-year-old. Let's say he needs to save enough to support himself through 30 years of retirement and doesn't want to trim his standard of living. How does he accomplish that?
He could work a little longer. If he works until age 67, his payouts from both income streams will start later and be larger. As a result, his money will last until he turns 80. That's better but not good enough.
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He could work longer still. If, after he retires at 67, he works two days a week (for two-fifths of his pre-retirement salary), his money will not run out until there are 88 candles on his cake. Close, but no cigar.
What if he saves more? Let's assume that instead of socking away 10 percent of his salary, he puts away 15 percent. His money runs out at age 74. But if he continues to work until he's 67, his nest egg will be worth $3.8 million when he retires. And on his 97th birthday, it will have grown to $3.9 million.
Our retirement shortfall can't be solved just by working longer. We'll also have to save more -- a concept the President's new budget proposal won't fix unless America buys in.
Kevin Prior, for one, doesn't think that sounds half bad. "I think Americans' views on retirement are skewed," he says. "I'm not saving to have a nest egg so that I can stop working altogether. I can see myself being an old, rickety accounting professor instead."
Additional reporting by Amy Wilson
Editor-at-large Jean Chatzky appears regularly on NBC's Today. Contact her by e-mail at moneytalk@moneymail.com
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