How to retire on your own terms
Why you should save 22 times the annual income you want to live on.
This post comes from Jason Zweig at partner site The Wall Street Journal.
By creating a new savings plan this past week called the myRA, President Barack Obama refocused attention on the retirement crisis.
While the myRA is a small step in the right direction, particularly for lower-income Americans, tens of millions of people remain trillions of dollars short of the savings they will need to fund their retirement.
The solution is simple, but it isn't easy. Americans need to save more -- not just a little more, but vastly more, according to a new study by two leading investment analysts.
To be assured of having enough money to fund a comfortable retirement, you should save a total of 22 times the annual income you want to earn when you retire. That is higher than many previous estimates, but it offers near-certainty of hitting your target.
For instance, if you want $100,000 in annual income (not counting Social Security), then your magic number is $2.2 million in total retirement savings. You can hit that magic number if you are prudent and willing to save money like mad.
Think of yourself as the sponsor of a traditional "defined benefit" corporate pension plan that sets enough money aside to guarantee a steady monthly income to retired workers for the rest of their lives. Then recognize that the only beneficiary of that pension plan is you.
That is the framework proposed in a recent article in the Financial Analysts Journal by Stephen Sexauer, chief investment officer for U.S. multiasset management at Allianz Global Investors in New York, and Laurence Siegel, who heads the CFA Institute Research Foundation, a financial think tank in Charlottesville, Va. They call it "the personal pension plan."
How would you manage such a plan to ensure that it never came up short?
You would consistently fund it with ample savings, invest patiently in low-risk assets and structure the payouts to provide steady income during a long retirement.
Some pension plans themselves have come up short, but only because they promised too much in benefits or set aside too little in assets, say Messrs. Sexauer and Siegel.
Individual investors, Mr. Siegel says, don't face the same pressures to fudge the numbers.
Many people working today are likely to live to the age of 100 or 105, says Mr. Sexauer. So if you work for 40 years, from your mid-20s to around the age of 65, you ought to plan on accumulating enough savings to last for up to 40 years of retirement.
How do the researchers arrive at their magic number of 22? Let's say you earn $150,000 a year and believe you can live well in retirement on two-thirds of that, or $100,000. (Estimates of the percentage of your working income that you will need to live in retirement vary widely from 50 percent to 100 percent or more, but many people find they can live on less than they thought -- even after accounting for health-care costs.)
The magic number answers this question: For each dollar of annual income you want in retirement, how many dollars of assets will you need to save before you retire?
Ideally, you want to be certain -- not just pretty sure -- that your money won't peter out before you do.
The closest thing to a riskless asset is Treasury inflation-protected securities, U.S. government bonds that promise to preserve your purchasing power. Conservatively assuming a rate of return of zero, a $2 million portfolio of TIPS will enable you to withdraw $100,000 a year for 20 years.
With the remaining $200,000 you have saved, Messrs. Sexauer and Siegel recommend buying a deferred life annuity up front. That type of insurance generates a constant payout before inflation that will cover your income needs if you live past age 85.
The two researchers base their estimate of the cost of this kind of annuity on price quotes from several insurance companies (Allianz, Mr. Sexauer's employer, isn't among them).
That is how saving $2.2 million before retirement will generate $100,000 in annual income with near-certainty.
Many people count on earning high investment returns to reach their retirement goals. If you invest in riskier assets, you might get a higher return, enabling you to save less.
But you also might get a lower return; that is what makes "risky" assets risky. In that case you would have to save even more to make up the gap.
Only by saving safely enough to end up with 22 times your annual retirement income can you guarantee that payout.
Both Mr. Sexauer and Mr. Siegel keep much of their retirement savings in TIPS to protect against the risk of coming up short. (A comparable method, from investment manager BlackRock, uses slightly different assumptions and comes up with somewhat lower multiples of income that you must save.)
"What you're doing here," Mr. Siegel says, "is saving and investing the same amount that a defined-benefit pension plan sponsor would to fully fund your pension." If you do that, "you'll end up with the same answer" -- a retirement you don't have to worry about.
More from The Wall Street Journal
VIDEO ON MSN MONEY
A fairly informative article but would probably garner more interest and positive responses if the numbers used were within the reach of most workers. Stop using six digit numbers as what one currently makes to explain one's retirement potential and stop taking the individual perspective. Most workers aren't even close to six digits and many will be married at retirement. And really? Most workers today are still baby boomers and not likely to live to be 100+!
#10. I vote Democrat because I love the fact that I can now marry
whatever I want. I’ve decided to marry my German Shepherd.
#9. I vote Democrat because I believe oil companies' profits of 4% on
a gallon of gas are obscene, but the government taxing the same gallon
at 15% isn’t.
#8. I vote Democrat because I believe the government will do a better
job of spending the money I earn than I would.
#7. I vote Democrat because Freedom of Speech is fine as long as
nobody is offended by it.
#6. I vote Democrat because I'm way too irresponsible to own a gun,
and I know that my local police are all I need to protect me from
murderers and thieves. I am also thankful that we have a 911 service
that get police to your home in order to identify your body after a
#5. I vote Democrat because I'm not concerned about millions of
babies being aborted so long as we keep all death row inmates alive
#4. I vote Democrat because I think illegal aliens have a right to
free health care, education, and Social Security benefits, and we
should take away Social Security from those who paid into it.
#3. I vote Democrat because I believe that businesses should not be
allowed to make profits for themselves. They need to break even and
give the rest away to the government for redistribution as the
Democrat Party sees fit.
#2. I vote Democrat because I believe liberal judges need to rewrite
the Constitution every few days to suit fringe kooks who would never
get their agendas past the voters.
…And the #1 reason I vote Democrat is because I think it's better to
pay $billions$ for oil to people who hate us, but not drill our own
because it might upset some endangered beetle, gopher or fish here in
America. We don't care about the beetles, gophers or fish in those
This is ridiculously impractical. The assumption is you average 100K/yr over 40 yrs. working and you have to save 2,200,000 in a pretty much return-free investment (TIPS). So you have to save 55,000 per year, or 55% of your income? Even if the $100,000 retirement target was only 75% of your working years income, you would be making 133K working and saving over 40% of your income. If that's not ridiculous enough, of course a real person's income in their first 20 years working is going to be much less than what they earn later, so they'd probably have to save 100% the first 20 years, not live and not pay taxes!
~ Senator Barack H. Obama, March 2006
Additionally, it used to be said you need 2/3 (67%) of your working clear income in retirement. Now they're saying 85%. But if you have things like a mortgage-free home or employer-subsidized insurance in retirement, that skews the number enormously. I know people who cleared $3500/month who are getting by with $1000 in retirement - though not by much. If they made $1600 or so - about half their working clear income, they'd be living comfortably.
People that can achieve such results don't read nor need to read this types of Articles.
Now that paying a Living Wage has become a Joke to Corporate America, the Article becomes pointless for most everyone else.
Any talk of retirement and retirement savings has to take into account inflation. I remember buying McD hamburgers for the kids for a quarter in the 1990s and now the lowest priced burger is a buck. I used to have prime rib dinners at upscale restaurants for 10-15 bucks which now costs me 40-50 bucks each. That is a 300% increase in inflation. Spending 100K a year now will not buy you the same things 20 years from now.
Since inflation is baked into the equation of retirement, you have no choice but to plan for it. The goal is not how much money can you save, but rather how much money can you generate annually that is inflation adjusted. Only then can you live a lifestyle that will not be cramped by inflation. Otherwise, like that wage being paid to more and more workers, you will have to continue to live on less and less.
Who can save 22X an annual salary in this country if they work for what they get? If we all had a scheme like "ask your doctor" ads, we could probably rake that in within an hour or so, but for the working people, it seems impossible.
I could retire easily and way less then that if it weren't for the fact that Good Ole Uncle Sam takes almost 50% of my money now and plans to take just as much of my retirement fund.
Back off on Seniors Uncle Sam and there wouldn't be a retirement crisis.
Yes it can be done if you stop spending money needlessly - - run the governement like a business does and there wouldn't be an issue doing any of this.
I hope people realize that the MY part of myRA
MY = Obama
not you or I
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