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Uncommon Sense

Zen and the art of retirement planning

MP Dunleavey
Editor's note: Columnist MP Dunleavey and eight other women have come together online to strip away the myths surrounding money, lay bare their assets and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" every second Monday in Dunleavey's column on MSN Money.

It's time to talk about retirement -- everyone's faaaaaavorite topic.

Now let's be honest. It's not retiring that's so scary, it's how much you need to save in order to get there. Or rather, how much you haven't saved.

"I don't feel like I'm making enough to get by, much less save for retirement," says Brice, 36, who has about $6,000 in her SEP IRA. "And, being a free-lancer, it's not like I can rely on a company pension or 401(k) -- so how am I supposed to deal with it all?"

Sadly, it's not just the free-lancers (i.e., Brice, Yalitza and I) who feel this way. The same anxieties about the future cause even people with well-endowed 401(k)s to grind their teeth at night.

A universal angst

  • "Will the amount I'm saving be enough?"
  • "How much is enough?"
  • "Even if I think it's enough now, will it really be enough then?"

Even the most retirement-secure member of our Women in Red group, Beth, is worried. At age 38, she has close to $50,000 in retirement savings! Plus, her government job allows her to sock away 14% (which she's doing), and then matches 5% of that. Plus, her in-laws gave her daughter a college fund account when she was born. Plus, her husband is an architect. My $5,500 IRA and I hate her.

But the truth is, like most of us, she's never sat down to figure out what her nest egg would yield in future dollars, nor has she estimated what she and her husband will need in 30-odd years. "It's a combination of fear and laziness," she admits, putting her finger squarely on the evil duo that keeps many of us paralyzed and clueless.

Stir in the destructive belief that the future will take care of itself, and no wonder so many people don't have a grip on retirement. "I didn't think about the future until recently," admits Yalitza, 33, who hasn't started saving for retirement. "I spent my 20s living paycheck to paycheck."

Don't try this at home
Fortunately the Internet abounds with retirement calculators. And most of them suck. If you must try one, keep in mind:

  • The number of variables that go into each individual's retirement situation are impossible to capture in one crude online tool. At best, these so-called calculators give you a ballpark figure based on little more than your current salary, current savings, X rate of return, the age at which you hope to retire, how many years you expect to be "in retirement" (that's code for "before you die") -- and a dollop of Social Security.
  • That ballpark figure you get is so terrifying that to face it alone, with nothing but your computer to hear you cry, is not worth the heart attack.

    For example, Brice and I were forced out of our paralysis by my deadline. She test-drove one online calculator; I tried two.

    She used the one on MSNBC and was told that, to retire on her current income of about $50,000 a year, she would need $744,000 in savings -- which would be worth $3 million in future dollars. And in order to get there, she'd have to save about $6,000 a month.

“I think I did something wrong,” she says, pointing to another flaw in these tools: they’re confusing. And nerve-wracking. “After I did this my neck was tight and I felt sick. It seemed like an impossible goal and I felt like I was going to be a bag lady.”

Move past the panic
My experience wasn’t much better. The CNNMoney calculator let me know that I had only a 50% chance of saving $547,000 by 2031, which is what I would need to have an annual retirement income of about $80,000, not including Social Security. Even better news: That would last me six years!

Question: Can I schedule an early demise by reason of financial hardship?

Fortunately, I had the good sense to call in some financial advisers. And I suggest you do the same before mucking about with your retirement numbers and giving yourself an aneurysm.

“If you use one of those calculators and find out that you need $5 million to retire comfortably, that’s just going to be a barrier to you moving forward,” says Susannah Blake Goodman, author of “Girls Just Want to Have Funds,” my all-time favorite money book for women.

The Zen steps you've been waiting for
And moving forward, as I learned, may not look like what you expect. “Money management has more to do with habits and psychology than with investment vehicles,” says Goodman.

Habit No. 1: Get a grip on your cash flow. Sharon Rich, a psychologist and fee-only financial planner in Belmont, Mass., (www.womoney.com) was shocked at how much debt some of us Women in Red had. “That tells me everyone needs to look at cash flow.” And while saving for retirement is vital, paying down debt should be the priority for now, she says. “You don’t want to set yourself up for failure -- going into retirement, while running up more and more debt.”

Habit No. 2: Save automatically. Obviously save the maximum your retirement plan allows. If you’re paying back debt, still save a little -- even $100 a month. But either way, don’t wait until that properly caffeinated moment: Arrange for your bank or employer to deposit that money automatically into your retirement account each month. “That way when your debt is paid off, you have a nest egg started,” says Goodman. (Then just add your former monthly debt payment to your retirement. Don’t treat it as a windfall!)

Habit No. 3: Be reasonable. If you’re paying off debt, saving for a home, raising kids or going to school, you simply won’t be able to save as much, Rich says. The most important thing: Don’t beat yourself up; all that shame, guilt and pressure only get in your way, Rich says. And don’t stop saving either. Beth knows that she and her husband could probably save more, but their daughter’s day care costs $780 a month (“more than our mortgage,” she notes). So she’s setting aside 14% of her salary, and, when her daughter goes to kindergarten, she plans to put that $780 toward their retirement.

Habit No. 4: Turn awareness into action. Women need to be proactive about their long-term financial plans even more than men do, for the simple reason that women live, on average, about eight years longer than men. And women still are paid less and often receive less from company pensions and Social Security because of time spent out of the workforce (caring for kids or family members). “Women start out with less and have to make it last longer,” says Rich. And taking positive steps is essential. Now.

Time to get going
As woeful as my online retirement calculator experience was, and although it left me with more questions than answers, at least it pushed me to make a decision I’ve been putting off: where to invest my SEP. (Like a lot of people, I didn’t realize I had to invest it, so I’ve had $5,500 gathering steam in a money market for a year. Whoo hoo.)

Next, my husband and I took an important step toward knocking down our debt and getting real about our cash flow. We sublet our second bedroom to a roommate for $900 a month, while we spend more time upstate, where the living is cheaper.

One more thing about retirement: You can’t do it alone. Get a financial planner to help you focus on your financial future. Or a money buddy. Or start a support group (information is available at The Money Club). I swear that if I weren’t one of the Women in Red -- never mind responsible for writing about our progress -- I don’t know when I’d take action on these things.

To paraphrase Gandhi, “Whatever you do will seem insignificant, but it is most important that you do it.”