The Best Route to a Rich Retirement

If you had to decide the single best thing you can do to assure yourself a prosperous retirement, what would you say it is? Financial advisers tend to recommend saving early and generously. That's a great idea, certainly, and you can see why advisers love it. (Oh, by the way, it gives the adviser more money to manage.) Live within your means is another hard-not-to-like first principle, and a favorite of populists like Suze Orman and Dave Ramsey. Steve Vernon, an actuary with restoflife.com and adviser to pension administrators, thinks the first thing you need to do is stay healthy. All good principles, but not my No. 1.

Make More Money

The key to a wealthy retirement came clear to me during one of the weirder workplace ceremonies of my career: a retirement party for a 44-year-old managing director of Goldman Sachs, where I worked at the time. I'm sure he had saved early and generously in Goldman's 401(k), lived well within his expansive means, and no doubt was healthy as a guy half his age. But what enabled him to bid the rat-race good-bye at such an early age was his paycheck. Thus my submission for most important retirement strategy: The best way to retire with a lot of money is to make a lot of money while you're working.

While that seems obvious, it does change the usual retirement discussion significantly. It suggests that the time you spend trying to get an edge in your long-term investing would be better spent trying to get an edge in your job. It means the best CBS MoneyWatch bloggers to read for retirement are Your Other 8 Hours, about using your spare time to build your earning power, and Power Plays, about getting ahead at work. Economists have long seen it this way. As York University economist Moshe Milevsky put it in this interview with CBS MoneyWatch: You enter financial life with a certain amount of human capital-the constellation of innate talents and acquired skills that determine your earning potential-and, by saving, you convert some of that human capital to financial capital over your lifetime. By the time age was worn the value of your human capital to nothing, you've ideally saved enough to live out your days in comfort off your financial capital. But it's a lot easier to do that if you start with a lot of human capital.

The Problem with Human Capital

There is a problem in putting this observation into play, of course. By far the most momentous decisions you make in building human capital are when you're young. Projecting off estimates by People Capital, which tracks workers' earnings history by college and by major, a student's decision to major in a low-demand field like English rather than a higher-demand one like bio-engineering, might vaporize the equivalent of $700,000 on the spot. (That is, it would cut the net present value of your future income stream from $2.2 million to $1.5 million.) Consider that the average 401(k) holder reaches age 55 to 64 with a total retirement assets of just $78,000-about one ninth the amount of human capital blithely foregone at age 19 or 20. In other words, choosing to major in English adds up, on average, to a monumentally bad retirement move.

In theory, you can make up some of that uneconomic choice later in life by leaving your job teaching English and going back to school in bio-engineering, but you'll never make up for the lost years. And at some point-Milevsky says that it's typically around age 50-the upside to radical re-training doesn't justify the cost. If you've reached that point, what do you do? Save like mad, live within your means, and mind your health.

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