that he should have $260,000 saved. He only has $50,000 saved, but he is willing to live on a much reduced retirement budget and assume a life expectancy of age 91. From Table 12.3, he can see that his retirement budget is only $18,000 per year, versus the $30,000 recommended for a comfortable retirement. Although this is a low budget, it is $4,000 higher than just Social Security retirement benefits alone. And since people do live on Social Security alone, the extra $4,000 per year makes retirement somewhat more feasible.
Given the smaller retirement budgets shown here, it is important to dis- cuss what is important about retirement. I am going to be presumptuous enough to say that it is freedom andwell-being. The retiree wants the freedom to not have to report to work every day. He or she may be tired of taking direc- tions from what appears to be a teenage boss. The 70-year-old retiree is also likely to be starting to feel the bones creak, and an afternoon nap is often just the right cure. The well-being part of retirement doesn’t just refer to health.
Well-being also includes not having to worry on a daily basis about how pay- ments are going to be met and having enough money for food and medicine.
Key Point
The well-being part of retirement doesn’t just refer to health. Well-being also includes not having to worry on a daily basis about how payments are going to be met and having enough money for food and medicine.
Most people, by the time they reach age 70, have realized that a new car and fancy house just aren’t all that important, and they will sacrifice those if that is the difference of being able to retire with some degree of dignity and affordability. Also, they have learned that chicken or a pork loin that is seasoned properly can taste every bit as good as steak, and the differences between a low- cost wine and an expensive one are often lost by the second sip. Indeed, I know several retired people who have a lot of savings but choose to live on little more than their Social Security every month. And these people seem no less happy than those living a far more luxurious retirement lifestyle.
Adjusting for a Pension and Different
Pension Adjustments
All of the earlier savings tables assumed that there was no company pension, which is true for most people. However, for those few still fortunate enough to have a pension, this section shows how much the prior baseline savings can be reduced.
Table 12.4 shows how much the Table 11.1 baseline savings for couples or individuals retiring soon can be reduced if they have a pension. This table is applicable for those with both fixed and inflation-adjusted pensions and for people retiring at age 60, 65, or 70. Examples following the table clarify it.
Couples or Individuals Retiring Soon with a Pension Scheduled to Start at Age 65
Example 1: Mary and John are a 60-year-old couple. They have a
$20,000 per year after-tax fixed pension that is planned to start at age 65.
Per Table 12.4, the pension will enable them to reduce their savings by 8⫻$20,000 ⫽$160,000. They earn $110,000 per year, have no mort- gage on their home, and want to retire soon. From Table 11.1, they need
$560,000 (baseline savings) ⫺$160,000 (pension reduction) ⫽$400,000 in after-tax savings to have a reasonably comfortable retirement with a
$50,000 per year after-tax retirement budget.
TABLE 12.4 Pension Adjustments for Couples or Individuals Retiring Soon with a Pension Scheduled to Start
at Age 65 Couples or Individuals Retiring Soon at Age 60
Fixed annual pension Subtract 8 times the after-tax amount of a fixedannual pension from the amount of baseline savings from Table 11.1
Inflation-adjusted annual pension Subtract 16 times the after-tax amount of an inflation-adjustedannual pension from the amount of baseline savings from Table 11.1 Couples or Individuals Retiring Soon at Age 65 or 70
Fixedannual pension Subtract 13 times the after-tax amount of a fixedannual pension from the amount of baseline savings from Table 11.1
Inflation-adjustedannual pension Subtract 20 times the after-tax amount of an inflation-adjustedannual pension from the amount of baseline savings from Table 11.1
Example 2:Grace is single and 70 years old. She has a $10,000 per year after-tax fixed pension that was originally planned to start at age 65. Per Table 12.4, the pension will enable her to reduce her savings by 13 ⫻
$10,000 ⫽$130,000. She earns $45,000 per year, has a $100,000 mort- gage on her home, and wants to retire soon. From Table 11.1, Grace needs $260,000 (baseline savings) ⫹ $100,000 (for the mortgage) –
$130,000 (pension reduction) ⫽$230,000 in after-tax savings to have a reasonably comfortable retirement with a $30,000 per year after-tax retirement budget.
Couples or Individuals Retiring in the Future with a Pension Scheduled to Start at Age 65 Table 12.5 displays the annual savings reduction per
$10,000 of an after-tax fixed pension that is scheduled to begin at age 65. Sub- tract the amount in Table 12.5 from the baseline after-tax amount of annual savings that was determined for those without pensions (Tables 11.2 though 11.7). People with inflation-adjusted pensions can subtract twice the amount shown in Table 12.5.
Example:Hank, who is single, plans to retire when he reaches age 70. He makes $100,000 per year before taxes, which puts him in the high wage category. He is 45 years old with no retirement savings. He has a $10,000 after-tax fixed pension scheduled for age 65, but Hank won’t start the pension until he retires at age 70. Table 11.7 showed that his baseline an- nual retirement savings are $9,384 per year after taxes. However, per Table 12.5, his expected pension allows him to reduce these savings by
$1,600 per year. So, his adjusted annual after-tax savings will be $9,384 ⫺
$1,600 ⫽$7,784. This will index up every year with inflation.
TABLE 12.5 Annual Savings Reduction per $10,000 of After-Tax Fixed Pension
Current Planned Retirement Age
Age 60 65 70
65 $21,800
60 $20,950 $ 8,500
55 $13,600 $ 8,200 $ 4,430
50 $ 5,300 $ 4,300 $ 2,600
45 $ 2,800 $ 2,500 $ 1,600
40 $ 1,600 $ 1,450 $ 870
35 $ 1,000 $ 850 $ 600
Because a fixed pension’s real value goes down every year with infla- tion, to keep its purchasing power the same, only two-thirds of the initial pension amount should be used, with the remainder invested. Every year, the portion of the pension that is used will increase with inflation. In this way, the real effect of the fixed pension, combined with the saved portion and its earnings, will remain constant. All the calculations in this book related to fixed pensions assume that this will be done. In many cases, early in retirement, people with fixed pensions will have incomes in excess of the retirement budgets assumed in this book. However, they must be sure not to use all their available funds and to invest the excess if they wish to maintain a constant retirement lifestyle.
Key Point
Since a fixed pension’s real value goes down every year with inflation, to keep its purchasing power the same, only two-thirds of the initial pension amount should be used, with the remainder being invested.