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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?

3. $3,300
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 $60,000 a year and contributes $6,000 (10% of salary, a good target) to her 401(k), she'll save $1,500 in federal income taxes, assuming she's in the 25% tax bracket (as most taxpayers are). Plus, if her employer matches 50 cents on every dollar contributed to the plan up to 6% of her salary (the most common matching formula), then her employer will deposit $1,800 a year in her account.

Add it together, and you get $3,300 worth of missed tax savings and free money from the boss -- the price today of not saving for tomorrow.

4. 2019
According to the report released yesterday by the Medicare trustees -- folks such as Treasury Secretary John Snow, Health and Human Services Secretary Tommy Thompson, and an economist with the ironic last name of "Saving" -- Medicare's trust fund is now projected to be depleted in 2019. That's seven years sooner than last year's projection, due in part to increased health-care costs, lower tax receipts, and the new prescription-drug benefit (which we were told would cost $400 billion over 10 years during the debate, but will cost well more than $500 billion now that it is law).

According to the report, Medicare represents 2.6% of U.S. domestic gross product. However, since the growth of Medicare costs will outpace economic growth, the program is projected to represent 3.7% of GDP by 2010 and 7.7% by 2035.

What this means is, health care and retirement are linked at the prosthetic hip -- becoming big-ticket, national issues. Comfortable golden years are no longer based just on savings, Social Security, and a pension. Retirement planning now also necessitates health-care planning.

5. $10,788
The Social Security trustees also released their report. The "good" news is that the date of Social Security's insolvency did not move up. As projected last year, the program will begin paying out more than it takes in by 2018, and the trust fund will be gone by 2042.

So, people who are, or will soon be, receiving Social Security are safe. And how much is the average retirement benefit check? Just $899 a month, or $10,788 a year. In other words, even while it's solvent, Social Security will not pay for the retirement you probably hope for. As the years go on (as years tend to do), it will pay for even less.

Here are some more stats for you, which are even scarier in light of that average benefit: According to the Social Security Administration, approximately two-thirds of seniors get 50% or more of their income from Social Security and about one-fifth rely solely on Social Security. (For more, see Six Social Security Myths.)

The stats that matter
Here are the most important numbers: the balances in your retirement accounts and how much you're contributing to them (or withdrawing from them, if you're retired). To see if it's enough, do a dance with our retirement calculators for a rough estimate. For professional input (and a far more sophisticated online planning tool), check out TMF Money Advisor.

Robert Brokamp is the co-author of The Motley Fool Personal Finance Workbook and the author of The Motley Fool's Guide to Paying for School
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