Just A Voice Crying in the Wilderness

This is not the article I planned to write this morning. However, I just finished reading an article entitled, “Retirement: A third have less than $1,000 put away” by Nanci Hellmich in USA TODAY. The results of another survey are available and they are horrifying. Not only are Americans not saving for retirement, they don’t even have a decent emergency fund. We are heading for a demographic disaster. Over the next twenty years millions of Boomers, with or without retirement savings, will simply be physically and/or mentally unable to continue working for a paycheck. For most Americans the defined benefit pension is a forgotten relic of a bygone age. Many of the municipal and state employees who are expecting to find a defined benefit pot of gold at the end of a 20 or 30 year rainbow are going to be severely disappointed. There simply isn’t enough money. Look at Detroit.

Here are the basic numbers for today’s working Americans excluding the value of their primary residence and any defined benefit pension. At any age, less than $1,000 is an emergency that requires immediate action. Less than $10,000 may not be a serious problem for a young couple with decent jobs, just starting out their life together. However, if they are married with children, less than $10,000 in the combined total of an emergency fund and retirement savings is a problem that needs to be addressed—Quickly!

•Less than $1,000, 36%
•$1,000 to $9,999, 16%
•$10,000 to $24,999, 8%
•$25,000 to $49,999, 9%
•$50,000 to $99,999, 9%
•$100,000 to $249,999, 11%
•$250,000 or more, 11%

One more time for the new reader, here are the quick and dirty basics of retirement math.

For an example, consider the terminal combined gross annual income of a couple as they near their planned retirement date at age 66. Let’s say $100,000. The best studies indicate that the average American couple spends about 80% of their preretirement expenses once they are actually retired. That means they need $80,000 a year, indexed to inflation, in order to maintain their lifestyle.

Let’s say this couple can draw $30,000 in combined Social Security benefits at their full retirement age of 66. That means they need to replace $50,000 a year to maintain their lifestyle in retirement. The famous Trinity Study and many other peer reviewed academic studies and responsible financial industry studies indicate that somewhere around a 4% annual draw from your retirement accounts is safe 98% of the time.

What this means is that if you have 50% of your retirement savings in stocks and 50% of your retirement savings in bonds, you can draw 4% of the total out of these accounts during the first year of your retirement. You can then continue to draw that amount increased to cover inflation out of your retirement accounts for the rest of your life with only a 2% chance that you will outlive your money.

In order to draw $50,000 indexed to inflation for the rest of your life, you will require $1,250,000 in retirement savings. In order to make the calculation for your particular case, just take the desired amount of income and multiply that number by 25.

Although this method of calculating retirement savings is intentionally simplistic, it is based on the best, most respected studies I have been able to locate. Of course if you have a defined benefit pension you can deduct that number from your retirement target salary just like you subtracted Social Security from the total number. If you live in a high cost, high tax metropolitan area, you can move to somewhere cheaper and warmer. This could significantly lower the 80% initial target. For example if you move to a place where the cost of living is 80% of your current place of residence, 80% of 80% is 64%. $64,000 minus $30,000 in Social Security becomes $850,000. There are an infinite number of retirement calculators on the Internet. Some of them are quite sophisticated. I probably tried all of them, at least once, before I actually pulled the trigger on my retirement. I suggest you do likewise.

The key takeaway is retirement is expensive.

No matter your age, save for your retirement. If you haven’t started, start today. If you have started saving, bump that savings rate every time you get a raise. If you aren’t getting every penny of matching money offered by your employer, increase your contributions. If you are 50 or older even 10 years in savings overdrive (25% or more of some combination of pre and after tax income into retirement savings) can produce results that are almost unbelievable. If you are still younger than 40 you shouldn’t have any problems if you make even a reasonably serious effort. If you avoid debt, time and the power of compound interest are on your side. Unfortunately the study notes, “Debt is weighing heavily on many people, with 58% of workers and 44% of retirees saying they have a problem with their level of debt.”

Here are the numbers for retirees. Once again these savings totals exclude the value of the primary residence and any defined benefit pension.

•Less than $1,000, 29%
•$1,000 to $9,999, 17%
•$10,000 to $24,999, 12%
•$25,000 to $49,999, 8%
•$50,000 to $99,999, 7%
•$100,000 to $249,999, 11%
•$250,000 or more, 17%

Source: Employee Benefit Research Institute