Updated: 1/26/2012 4:13 PM ET|
How much you'll need to retire
Many of us are afraid we won't have enough money -- though we don't know how much that would be. Six easy steps can help you calculate a goal and chart your progress.
Millions of Americans fear retirement.
They fear the unknown. They fear not having enough money to live comfortably. They fear they are going to end up living in poverty and eating cat food, as the cliché goes.
"Americans' confidence in their ability to afford a comfortable retirement has plunged to a new low," says the latest annual Retirement Confidence Survey from the Employee Benefits Research Institute, or EBRI, a respected nonprofit think tank.
For the first time since EBRI began tracking the numbers, less than 50% of workers in the 2011 survey were confident about their ability to retire comfortably. The number "very confident" had halved in a few years, to just 13%. (Are you saving enough for retirement? Check MSN Money's calculator.)
Meanwhile, the number with no confidence at all had nearly tripled, to 27% -- more than one in four.
A similar number of people questioned whether they would be able to meet even their basic expenses.
I am convinced that one of the biggest problems is that people don't know how much they'll need. Many don't even know how to start working that out.
According to EBRI, just 42% had even tried to work out how much they'll need. The most popular way of estimating retirement needs is guesswork.
OK. Here's Retirement 101. If you're totally baffled, try these six simple steps. It's not a plan. But it's something anyone can do in 10 minutes or less, and it will give you a much better idea where you stand -- and what you need to do.
1. Figure out how much income you'll need. This is the first step. This is where you need to start.
What sort of income will you need each year in retirement? What would be comfortable? What would mean real hardship?
Some people will tell you to sit down and draw up an elaborate budget. And maybe that's the perfect solution.
But you could take a shortcut instead. Every experienced financial planner I've spoken to, when pressed, has given the same answer. For most people, the best guess for the income you'll need to live on in retirement comfortably is about the same as the income you need now.
Simple. Easy to remember.
Obviously, a few things will be different in retirement. You'll no longer have to set aside money to save for retirement, for starters. If you expect to pay off your mortgage by then, you'll no longer have to set aside money for that. The same goes for putting kids through college. But once you've eliminated those costs, the best way to calculate the disposable income you'll need in retirement is to look at the disposable income you have now.
Sure, you can make adjustments. You may find you're comfortable with less. (Or you may want more.) But when you are dealing with the unknown, it helps to start with something familiar. In this case, try your current disposable income.
2. Figure out much you will get from outside sources. That means how much you will get from Social Security. It may also mean how much you will get from a pension plan, if you are among the diminishing few who have one.
Social Security is central to most Americans' retirement plans. It is an inflation-protected annuity that will last your lifetime and where the insurer, Uncle Sam, won't run out of cash. (Any jokes about Ben Bernanke and printing presses should be sent, please, to the Federal Reserve, not to me.)
This is why it's such a political hot potato.
What does Social Security mean for you? The Social Security Administration posts an online calculator that will help you work out what to expect in benefits. As of 2011, the average retired single worker got $14,000 a year. The average couple: $23,000.
If you are among the shrinking group of people eligible for a pension, you should work out how much you are going to get from that as well. Add that to your expected Social Security benefits.
3. Figure out how much income you will need from your investments. Once you know how much income you'll need (Step 1) and how much you can expect from Social Security and any private pension plan (Step 2), it's easy to work out how much you're going to need from your own investments.
At the risk of stating the blindingly obvious, it's what's left over. Call it the Cat Food Calculation -- the amount of money you are going to need each year so you won't have to share dinner with Tibbles.
That means a married couple that, say, lives on $40,000 a year in disposable income, has no pension and expects Social Security benefits of $23,000 a year is going to need to provide $17,000 a year from its own resources. And so on.
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4. Understand how long your investments will have to last. In other words, how long you're likely to live in retirement.
There's a very good chance it's longer than you think. That's great news, of course. But it doesn't help your math.
The average life expectancy in the U.S. these days is about 75 for a man and 80 for a woman. Those data are from the U.S. census. And they're completely useless for retirement math.
Why? Because you are unlikely to be exactly average. And your fears are asymmetric. From a purely financial standpoint, you don't want to outlive your savings, even by a couple of years.
Furthermore, those life-expectancy figures are measured from birth, not from age 65.
Much more useful are the cohort survivorship figures calculated by the U.S. Department of Health. Of those who make it to 65, 25% will go on to live to 90, they show. Among women it's 30%. And of women who make it to 65, 12%, or one in eight, will live to 95. Quite a few, about 3%, will live to 100.
I have a couple of friends going very strong indeed in their 80s. Fortunately, they are financially secure. You do not want to find yourself there with your money running out.
In other words, to save enough for your retirement, you're going to have to set aside enough money to provide you with a suitable income for several decades. Think 25 years, maybe even 30.
5. And here's your answer. You now have the data to make some estimates.
Let's say you plan to retire at 65 and will need an income of $10,000 a year from your investments. (We'll take that, as it's a simple place from which to start the calculations.) And you want to make sure the money will last up to 30 years.
How much will you need to save?
Some people will direct you to the annuities market for some answers. An immediate fixed annuity is a product from an insurance company that will provide you with a guaranteed income for life.
A 65-year-old man who wants an income of $10,000 a year for life could buy an annuity for $130,000. A 65-year old woman would pay a little more, $140,000, because the insurance company figures she'll live longer.
So that's it, right? You'll need to save about 13 or 14 times the extra income you need? (Is your 401k going to provide enough? Find out with MSN Money's calculator.)
Not so fast.
Those annuities won't protect you from inflation. And that's a very big deal. Over 20 or more years, even modest rates of inflation will hurt you. An inflation rate of 3% will nearly halve your purchasing power.
There are, alas, very few annuities that offer inflation protection. A reasonably conservative investment portfolio, suitable for someone in retirement, can do better.
Think of a portfolio of inflation-protected Treasury bonds, known as TIPS, and high-quality blue-chip stocks. Although both offer lower returns than usual at the moment, most of the time you would expect a portfolio like this to earn an average return of inflation plus about 3% over the course of an economic cycle.
Based on those numbers, you probably need to set aside about 20 times your required annual income by the time you retire.
If you need your portfolio to generate $10,000 a year and last up to 30 years, for example, you'd want to start with about $200,000. If you need your portfolio to generate $50,000 a year, you'd want to start with $1 million.
6. And how to stop panicking. It's no wonder so few people want to do the math. They haven't saved anywhere near enough.
The most depressing data from each year's EBRI report are the numbers showing what people have actually saved.
Fewer than one worker in two has even managed to set aside $25,000. Fewer than one in four has reached $100,000 -- itself only enough to generate $5,000 a year.
Yes, the numbers are slightly better for those who are older and nearer retirement. They've had longer to save. But even among them the picture is dismal. Among workers older than 45, just 54% have even managed to save $25,000 or more.
Remember, this is after three decades of supernormal investment returns. Stocks boomed through the 1980s and '90s. Bonds have boomed for 30 years. Future returns from here are highly unlikely to be so favorable.
Those falling short will need to save, save and save even more. The sooner they start, the more likely they are to make it.
The one cheerful caveat: The EBRI numbers do not include the value of people's homes. If you have a lot of equity in your home, you can convert that into extra savings if you need to, either by selling or by using a cash-out reverse mortgage, which allows you to convert some of your equity into cash. (The financial planners I've spoken to on the subject point out that these mortgages typically involve high fees. But they are, at least, an option.)
For those facing a retirement-savings crisis, the strategies for adapting are well known but worth reviewing. They include scaling back, moving somewhere much cheaper and delaying retirement as long as possible, which works multiple levers. It gives you longer to save, it gives your savings longer to grow, it reduces the length of time you will need to live off your savings and it boosts your Social Security income. Even working part time can help.
There are no easy answers. But the real problem is that most people still don't even understand the questions.
Every so often, when I write about consumer products, I point out how much money people are taking out of their retirement portfolios in order to buy today's gadget or fancy trip or even a meal out. I get a few derisive emails from people wondering why I am "so stupid" as to think like that.
Now you know why.
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I love the article. Facts are facts, people have refused to save for retirement,, 54% over 45 years of age having only 25K,,, sad. Well, people fail to use the proper name of SS... It is a SUPPLEMENT,,it is only meant to aid in retirement, which means, you must save. It should cost less to live in retirement if your home is paid off. I agree also that it is more probable to spend more money. You will have hours and days for travel and doing those things you had no time for when employed.
As far as health costs, you have an option of moving out of country. I live in Colombia (why do I want to go to Vegas, Az, Carolinas, or Florida) where the weather is great year round and cost of living is cheap. Health care is less than 30.00 a month for a couple. You get total prescription, eye, dental and health care. You pay of course 1.00 for the prescription or 1.00 to see a doctor. I had a wisdom tooth removed (paid 2.00 to have x-ray) in extras. Why is the US so expensive? Gas is relatively same, but there they use natural gas conversions (50 cents gal) or in Venezuela 10 cents a liter.. Why do we pay 3.00? I think you know the answer,, Taxes,, again, liter Absolute for less than 10 bucks,, again,, No taxes.. cigarettes (I do not smoke) for 1.25 pack,,, you figure it out,, retire out of US,,, you actually get treated very nice in Latin countries,, they look at all Americans as rich gringos,, and you are with your SS. So, do not fret,, but at least Save for the future and do not worry,,,, Adios...
I went out at 57 and am doing just fine the house is paid for, life is grand.
I'm living on a small pension and when I turn 59 1/2 my income will double and at 62 it will double again. Americans we; no you are a bunch of whiners. This whole retirement comes down to one thing CHOICES you made during YOUR life don't blame anyone but yourself.
Sorry for the rest of you but I made the RIGHT choices during my life .... oops my bad !
Take it from me. I have been retired for nine years. Inflation must be figured into any retirement plan. What looked good at retirement will fizzle out after a while due to inflation. Things that used to cost 59 cents are now $3.59. One of the hardest things for me to get used to is inflation. I can spend a $100 and not even have a sack full of groceries. Today this is normal, but it is not normal for someone that remembers a 5 cent candy bar. True, back then the minimum wage was $1.10 a hour. But that 5 cent candy bar was much larger than the candy bars of today. $100 is just pocket change today. I never even seen a $20 bill until 1962.
Inflation will have you spending more, but enjoying it less.
If you sell out and move to a cheaper place, good luck finding a job at age 65, even one bagging groceries. If you have a job, it will be a tough choice between delaying retirement and moving somewhere much cheaper.
I'm already in Florida, have been for 55+ years, and have seen nothing but tax increases and an erosion of the quality of life and environment as the real estate developers paved over everything. Those houses and condos are mostly empty, now. Developers do more damage than hurricanes, any day.
This is nothing more than an attempt to scare us into investing. I don't like gambling with my money. I have a retirement from the Government for my 26 years of U.S. Naval service, and that will carry me through if I am smart. Also, using the equity in your home for investing is insane to me. I want things paid off, not continue with debt until I die just so I can live comfortably. Then what do I give my kids? At least they can have my property, then sell it to pay for some of theirs. That's call passing it on. It's great to do with everything....except debt.
Retired at 53 nine years ago and I am doing just fine.
If you delay retirement planning now, you are going to pay big time later.
18 years old would be the perfect time to start planning.
I started retirement planning at 25 and it is paying me back just fine.
I have not even started using my 401K yet as so far, I don't need the extra money, so it is just sitting there in reserve.
Life is good.
It all comes down to retirement planning EARLY during your working phase, not at 50 years old.
It can be done, IF you start early.
If I can do it, anyone can.
As for me ...I have been saving for 17 years ( I'm 50 now )....All of the money I have in my 401k has NOT moved in 10 years.....That and the HIGH cost of GAS, Food, And I NOW I have to pay for Insurance ( that started 12 years ago) So the company I work for can make Millions.. If not Billions
The stock market crash of 2008-09,
The GREAT RECESSION ( YA OK It IS the DEPRESSION if you ask me ! ).
I've lost my house to the 3 year arm SCAM of 2008 ,
My car is 14 years old and I can't afford another one .
I'm renting a very small house the won't stay warm, And the heating bill is
eating what little money i do save ...BUT Big business is Thriving, So I guess all of MY (aND YOUR'S) sacrifice's are good for them .
ISN'T THAT WHAT LIFE IS ALL ABOUT ??? ...WORK FOR 40-50 YEARS TO MAKE SOME PEOPLE RICH...SO WHEN YOU RETIRE, THE COMPANY YOU SLAVED FOR CAN TELL YOU ....HOPE YOU SAVED ENOUGH TO RETIRE HERE'S 3-6 MONTHS OF INSURANCE ( IF THAT) AND HAVE A NICE LIFE !!!!!!!
I don't plan to retire until I'm 93
...it worked for Andy Rooney
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