Thinking About Retirement?

9) Start thinking about retirement when you are young. Take advantage of anything offered by your employer. This was not a problem or an issue 50 years ago, but my retirement picture is not all that good. Your retirement picture is positively scary. This is a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.

I am not revisiting the ten financial rules for young couples on purpose (yet). It just seems like every week there is new information in the financial press that calls for an update. Number 9 on my list encourages young couples to prepare for retirement. According to a recent CNN article, the number of Americans doing any savings for retirement dropped from 75% in 2008 to 69% in 2009. This is not surprising as it is difficult to save for retirement if you have lost your job. Fear also plays a role in this trend. The recent stock market and real estate crash damaged the American workers’ belief in the future. Many of them are too frightened to reenter the market. In addition, some workers were contributing to their companies’ 401K programs to get matching money. In many instances corporate contributions to their employees’ retirement accounts has been suspended or eliminated altogether.

Several articles note that Americans have no idea how much money they will need to retire. Actually, that is a pretty easy calculation. Using the current conventional wisdom, pick a number for a retirement income that is at least 75% of your current income. Of course, expense can be lowered, especially by a move to a lower cost of living area, but surveys indicate that folks don’t spend all that much less in retirement.
Some experts recommend 80% as a target.

So, let’s say your current combined family income is $89,000 (about average in Montgomery County).

89,000 X 0.75 = 66,750

Now let’s assume a Social Security income of $20,000 a year. By the way, that is actually a rather complex decision. Based on current law, there are many options. For example it might be prudent for a wife who is entitled to a smaller payment than her husband to begin drawing Social Security at 62, while her husband defers until age 65. These scenarios should be carefully examined in the light of current legislation in the months prior to applying for benefits.

66,750 – 20,000 = 46,750

For the sake of this example, let us assume that someone has at least a little bit ($10,000 a year) of a defined benefit pension. Unfortunately what was once almost the right of every gainfully employed American is becoming a benefit limited to union and government employees. I expect the number of Americans with defined benefit pensions will continue to decline.

46,750 – 10,000 = $36,750

Now, take that last number and divide by 0.04. This assumes a “safe” 4% per year draw on your retirement savings.

36,750 ÷ 0.04 = $918,750

So, there you have it. Want to maintain an “average” Montgomery County lifestyle? You will need almost $1,000,000 unless you have a CSRS pension. Until recently, most folks assumed about ½ that number would be generated by the sale of their home. That was a good assumption until 2008, but not any more.

How much do Americans have in retirement savings?

43% have less than $10,000.
54% have less than $25,000.

Many just blow off the numbers and expect to work past age 65. Is that a good assumption given the destruction of wealth creating jobs over the last two decades? No one can state with certainty what normal or structural unemployment might be in our current economy, but I bet it is a lot higher than the old 3% to 4% unemployment defined as “full employment” by economists.

Let me give you one more scary thought. Let’s say you have saved $1,000,000. You can safely withdraw $40,000 a year. Now let’s say the market drops and your account falls to $750,000. Now you can only draw $30,000 a year. Given 4% inflation, this is not a happy scenario.

The cost of medical care is the last big unknown. MEDICARE is probably going to be broke within my lifetime. I have been paying high taxes to support MEDICARE my whole life, expecting to have that benefit when I will need it. Generally, health declines as one reaches old age. If politicians try a bait and switch on the baby boom, look out. If they try and overtax the next three generations to pay for the unlimited hospitalization and medical care of their elders, things could get real ugly real fast.

More than ever we need to remember Proverb 3: 5 and 6.

[5] Trust in the LORD with all thine heart; and lean not unto thine own understanding.

[6] In all thy ways acknowledge him, and he shall direct thy paths.