Getting Started in Investment Analysisdoesn’t attempt to address how much sav- ings it would require to live the luxurious retirement lifestyle fantasized in advertisements. But this book doesgive those who are interested in planning for retirement some idea of how much they should be saving, or should have already saved, to be able to have a comfortable retirement. It also shows that, for those who are approaching retirement with too little savings, the emphasis has to be on retiring later and limiting retirement expenses, because these two things are generally in the retiree’s control.
At first glance, the required retirement savings shown in this book may be overwhelming. Retirement is not inexpensive! And the accumulated savings needed to support a retirement of 30 or so years is substantial. Since many peo- ple don’t even thinkabout saving for retirement until at least age 35, for every year they have left to work they must be preparing for one year of retirement.
The retirement savings burden is even greater for those who delay saving until after age 35 or who want to retire early.
Most people are aware of the importance of starting to save for retirement early in their careers, but that awareness doesn’t help them in determining how muchthey should be saving each year or how muchthey will need at the time of retirement. Those are difficult numbers to ascertain. One recent article said simply that you need a million dollars to retire. That kind of flippant advice does little to help someone determine meaningful retirement savings.
The idea that people should be able to retire when they still have many productive years ahead of them is a relatively new concept. Certainly it wasn’t a given before 1945. Life expectancy and the age at retirement were such that most people did not live all that long after they retired. And the years they had left weren’t expected to be filled with days of golf and travel. Instead, they were often spent living with and being supported by their children.
Key Point
The average boomer has only $50,000 saved for retirement. In fact, when boomers are polled, many just say that they probably will never be able to retire.
But attitudes about retirement have changed. Most everyone now feels that society entitlements and personal funding should be sufficient for them to retire while they still have the health and desire to pursue a satisfying life that doesn’t involve work subjugation and without having to be supported by their children. The personal funding requirement to fulfill this goal is the subject of Part 4 of this book.
Since no one can exactly predict the future, no book, computer program, or money manager can give someone a guaranteed exact retirement savings amount. Not only are future required expenses not precisely known but what a reasonable retirement goal is varies dramatically between individuals. Also, unless someone is extremely wealthy, no one can prepare for possible catastrophic health care costs. That said, people still need some general idea of what their retirement savings should be; otherwise, how do they have any chance of planning for retire- ment? The goal of this book is to give retirement savings estimates such that a person, or couple, could live at a comfortable level to age 100 (or an optional age 91) with a high probability of not running out of retirement funds.
After looking at this book’s general guidelines, many people will realize they need to adjust their retirement savings, their planned date of retirement, or their desired retirement budget. Since no one can predict how long they will live, ideally we must look at the possibility of living to age 100. Even though the probability of living to age 100 is low, for a couple who are 60 years old, there is a 2 percent chance that one of them will live to the age of 100. In the past, people have often not planned for an extended life. Because of that, a disproportionate number of current retirees (10 percent)
are living below the poverty line. One of the goals of this book is to help people analyze their retirement planning so they don’t join that impoverished group.
Determining retirement savings is not easy because it requires dealing with the future value of money and other calculations that make most people’s minds hurt. It requires making some allowance for inflation and some estimate of what investments will earn in the future. Some retirement incomes go up with inflation, like Social Secu- rity, and some benefits are fixed, like most company pen- sions. People must also make some prediction about the future of Social Security retirement benefits. The general savings guidelines in this book do this for you. The details of the assumptions that were used to generate this book’s guidelines are discussed in Chapter 13.
This chapter gives general savings requirements for a comfortable retirement without unnecessary detail. But many people will look at the numbers in this chapter and
Social Security A U.S. federal program that includes retire- ment benefits
Pension A sum of money regu- larly paid as a retirement benefit
conclude that they just can’t get there. So, the next chapter gives suggestions on how people can retire with less than this chapter’s recommended target savings, gives specific adjustments for those with pensions, and provides adjustments for people wishing to modify the book’s assumed retirement budgets.
Some readers won’t accept the retirement savings guidelines in this book.
They will find some financial planner who will promise them fantasy returns on their investments that supposedly will enable them to live their desired retirement lifestyle with fewer savings. Of course, the only desired lifestyle likely to be satisfied in the long run is the financial planner’s! Brokers and money managers often assume high stock market yields, they underestimate the disastrous effects of inflation on fixed-income sources like company pen- sions, and they make no allowance for any future changes in our underfunded Social Security retirement program. People want to believe that they can retire with little savings, so money managers have a ready group of gullible potential customers. And it will take many years for the naive retiree to see if the promised high yields really happen. In the meantime, the money manager still receives the fees with or without the promised high investment yields.
Key Point
Brokers and money managers often assume high stock market yields, they underestimate the disastrous effects of inflation on fixed-income sources like company pensions, and they make no allowance for any future changes in our underfunded Social Security retirement program.
Retirees are often not realistic about how retirement expenditures must be budgeted, especially with regard to inflation. The initial retirement savings amount is likely to be the highest savings they have accumulated in their lives, and it can give them a false sense of security. Some people travel and spend pro- fusely early in their retirement before they become aware of how fast they are draining their funds. They are then forced to dramatically reduce their living standards to survive the remaining years. Sadly, recovering from excessive spending in the first few years of retirement is often impossible.
Retirees often convince themselves that the companies they work for will miss them so much that they will call them back as consultants, enabling the retiree to maintain a part-time earnings source. Seldom does this happen. Also, some retirees plan on getting part-time work at a low-pressure job in a different field. Some surveys show that as many as 75 percent of retirees expect to work after retirement. The problem is that the jobs available for retirees often generate little pride or earnings. And with the influx of baby boomers, many of whom have sim- ilar work plans, these jobs will be in short supply. Wal-Mart can use just so many greeters! Generally, people are far better off extending their work years with their current employers rather than counting on part-time work after they retire.
In this book, retirement expenditure numbers are assumed to be adjusted up each year with inflation. In this way, the retiree’s relative lifestyle remains constant. The base assumption is that once savings run out, home equity can be tapped to maintain a given lifestyle for another seven years or so. People who don’t own their homes will not have home equity to fall back on when their other savings are gone, so they will either have to save more or just accept that they will not have the excess equity funds available.
To use this book, you must identify which of three earnings groups per- tains to you.
1.High-wage earners (above $90,000 working income per year before taxes) account for 15 percent of wage earners.
2. Above-average wage earners ($50,000 to $90,000 working income per year before taxes) are 25 percent of workers.
3.Average wage earners (below $50,000 working income per year before taxes) are the remaining 60 percent.
These three earnings groups have different retirement needs, out of both choice and circumstance.
High-wage earners often have some defined costs, such as real estate taxes and utility costs, which are far higher than those in the lower-earning groups.
These higher costs necessitate higher retirement budgets. Theoretically, the higher wage earners could downsize at retirement and adjust to the lower bud- get of an average wage earner, but their prior lifestyles make it highly unlikely that they would choose to do that unless absolutely required. Also, the Social Security benefits of each of the three earnings groups vary dramatically. The much lower Social Security benefits of those in the average earnings group means that they must save relatively more than those in the higher earnings groups to have a comfortable level of retirement income.
A few general notes on using this book: Ages, incomes, pensions, and other factors will probably not exactly match any of the reference groupings shown. Just use the grouping or numbers that are closest, or estimate between two spanning numbers. Any resultant error will be small in comparison with the many future unforeseeable financial events. Each chart is followed by one or more examples that illustrate the use of the data.
Current retirement savings should include the after-tax value of a 401(k) retirement plan, stocks, bank accounts, excessive equity value in a primary or secondary home (more than needed for a downsized and accept- able home), equity in rental property, and the like. Do not include savings slated for other things. If savings are likely to be used to pay for a child’s college education or a new car, they should not be included in retirement savings.
This book assumes that the Social Security full retirement age will be raised to age 70 by the year 2016. This will make Social Security self-sustainable.
Details are in Chapter 13.