The following comes from an interview with economist/attorney/actor/comedian Ben Stein. The interview actually dates back to July 2005, but the subject matter (America’s growing retirement crisis and how best to invest your money) is timeless. It’s a pretty long piece, so I’ve split it up into three parts.

Can Americans count on the Social Security privatization plan to boost their savings?

No. It’s actually a distraction from real retirement planning. Squeezing extra returns from your government benefits — the average payout for retirees currently is just $958/month — is not going to enable you to retire comfortably. That will happen only if you make saving an everyday priority.

How much do you put away?

I have been worrying about my retirement since I was 13. I’m 60 now, and although I expect a modest pension from the Screen Actors Guild, I’m also trying to save very aggressively on my own — about 20% of my annual income.

Few people can afford to save that much. How can the average person squirrel away more money?

Look, people in China, which has only 14% the gross domestic product per capita that we have, save 40% of their incomes. Americans save roughly 1%, so we can do a lot better.

A clear-cut goal makes it easier to deprive yourself of indulgences. You can calculate how much you will need in retirement at the AARP web site. Be sure to use 100% of your current living expenses as your goal.

You can live on less — but a man of 65 today is likely to live to 80… a woman of 65 is likely to live to 83 1/2. Prices could increase by 75% or more by then, so you must generate income in excess of what you need today.

Where do you invest additional money after you have maxed out retirement plan contributions?

Any additional money goes into variable annuities. That advice came from my father, who served as chairman of the Council of Economic Advisors under Presidents Nixon and Ford. He did not earn a lot of money in his lifetime, but he had a comfortable retirement because owning annuities meant that he never had to worry about outliving his money.

Haven’t a lot of people been burned by variable annuities?

Annuities have taken a lot of heat in recent years because of over-aggressive selling by the insurance industry and lots of hidden fees.

But if you do your homework, you’ll realize that transferring the financial risk of living a long life to the insurance company and away from yourself is worth a look.

For a primer on annuities, visit the SEC web site … or research low-cost offerings from TIAA-CREF (800-842-2252) and The Vanguard Group (800-523-7731).

How do you invest your retirement money?

I have always been very diversified, so I have never suffered a catastrophic loss. I spread my money around the way a large institutional investor does. I use different brokerage firms. I manage some of my accounts myself… I hire money managers for others. I own wide-ranging global asset classes — from emerging-market bonds to real estate investment trusts (REITs).

My thoughts: I tend to agree with Stein’s assessment that people can do a lot better when it comes to saving for the future. We’re currently socking away 19% of my income for retirement (including my employer’s 5% match) — we started at 15%, and we ratchet this up by 1% every year when I get a raise. We don’t miss money that we’ve never had, so this makes it completely painless. As far as our non-retirement savings go, we have a good bit in Vanguard Total Stock Market Index Fund (VTSMX), as well as a variety of other places, including a high yield savings account and CDs at PenFed. I also agree with the idea that diversification is an important aspect of investing — in fact, we just redistributed our retirement portfolio to achieve better diversification. We’re still not as diversified as Stein, but we also don’t have nearly as much money to work with.

See also: An Interview with Ben Stein, Part 2

[Source: Bottom Line/Personal]