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|Subject: Wretched Retirement Realities||Date: 3/24/2004 4:45 PM|
|Author: TMFTwitty||Number: 9124 of 20014|
Wretched Retirement Realities
As much as retirement is a "lifestyle," it all comes down to numbers: how much do you save, how much do your investments return, and how much income will your nest egg provide. Will your numbers add up to a full-figured retirement?
By Robert Brokamp (TMF Bro)
March 24, 2004
Ah, retirement. A time for travel, hobbies, family, and the "stick sports" (golf, fishing, shuffleboard, and walking along the beach with a metal detector).
Also, $1.25 million. That's how much you'd need if you wanted your savings to provide $50,000 of inflation-adjusted retirement income every year, with a good chance that you wouldn't outlive your money.
We don't mean to tarnish your visions of unfettered free time and leisure activities. In fact, we think you should keep your dream retirement forefront in your mind -- it'll motivate you to work for that day when you no longer have to work.
But like so much in life, being able to kiss the boss goodbye is a numbers game. Here are some of the numbers to consider as you work for that full-figured retirement.
1. 4% to 6%
Let's start with that $1.25 million mentioned earlier. Most studies indicate that if you want your savings to last, you shouldn't withdraw more than 4% to 6% each year (4% of $1.25 million is $50,000). The exact amount depends on many factors, including how long you plan to live. OK, so you can't "plan" your life expectancy, but someone who retires at age 60 and is in good health should withdraw a smaller percentage of assets than should a veteran of World War I (of which there are less than 1,000 still alive, though Alfred Pugh, the last wounded veteran of the war, died earlier this year).
Your withdrawal rate also depends on your other sources of retirement income (Social Security, pension, part-time work). If your other sources are significant, you can look at your withdrawal rate in two ways: (1) You won't need much from savings, so you just take out a little at a time, leaving the rest for emergencies and/or your heirs; or (2) you have other sources of income to fall back on if you outlive your savings, so you can bump up your withdrawal rate.
If you don't expect a huge chunk of income to come from sources other than your savings, then you need to be more conservative with your withdrawal rate -- and more aggressive with your savings rate, if you're not yet retired. (You still have a few weeks left to contribute to a 2003 IRA.) For more on withdrawal rates -- and there is much more -- read How Much Are You Gonna Take?
2. $3,200 to $4,800
Given a withdrawal rate, you can apply it to your own savings to see how much retirement income your current savings could provide. This offers a quick snapshot of where you are -- and how far you might have to go. As an example, let's look at a hypothetical saver, using some real-life stats.
According to various sources, including the Employee Benefit Research Institute and Alicia Munnell and Annika Sunden's Coming Up Short, the median balance in a 401(k) is about $40,000. The Investment Company Institute says that the median balance in a traditional IRA is $30,000, and the median balance in a Roth IRA is $10,00.
So, let's assume our hypothetical saver has one of each of these accounts, along with the median balances, resulting in a total retirement savings of $80,000. Applying our 4% to 6% withdrawal rate, we get annual retirement income of $3,200 to $4,800. Not a whole lot, is it?
So, as a nation, we're not saving enough. There are lots of reasons for this, one of which is our unwillingness to forgo current consumption in order to save for a goal years -- even decades -- down the road.
However, not saving has a real cost today, at least when it comes to using retirement accounts. The less that is contributed to a 401(k), 403(b), or similar account, the more taxes are paid, since contributions are essentially tax-deductible. Plus, workers who don't participate miss out on the employer match (if there is one).
Again, let's look at an example. If a worker earns $60,0