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How to retire on your own terms

Why you should save 22 times the annual income you want to live on.

By Money Staff Feb 3, 2014 5:33PM

This post comes from Jason Zweig at partner site The Wall Street Journal.

The Wall Street Journal on MSN MoneyBy 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.

A bird nest full of money © David R. Frazier Photolibrary, Inc., AlamyThe 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

Feb 5, 2014 9:11AM
Retirement is what I am living for now. It has become my # 1 dream. I have just fifteen months to go and counting down. No more bosses, no more schedules, no more drama around crazy, whinny and hormones-out-of-wacky co-workers. I can wake up when I want to and eat when I want to and I can do what I want to without being told what to do. I suffered long and hard for that 25 year pension. Had it not been for that added income to be, I would have said to them, "You can take this job and shove it, cuz I ain't workin' here no more!" There is life after jobs. 
Feb 5, 2014 7:04AM

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+!   

Feb 5, 2014 11:31AM
I retired my way, your article is only for security at all costs folks who don't think for themselves. To "need" a 100 grand a year for retirement and not spend the principal makes no sense whatsoever. In fact I found no sense in this article. BIG THUMBS DOWN!
Feb 5, 2014 11:57AM

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!

Feb 3, 2014 7:14PM
That 22x sounds reasonable to me, but only after you subtract out your expected checks from Social Security and any Defined Benefits Pension and other regular sure income from the total income you'll need when retired.

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.

Feb 4, 2014 8:08PM
I am going to "retire" for the day right now.  The local news is on but I am not going to llisten to it.   I am going to bed so I don't have to listen to "ask your doctor" "medicare supplement" "we kin gitche sum muni" "reverse mortgage" "tell your doctor" and "do it today!" any more this day!!!!!!!!!  I am not voting for ANYONE currently in office.  If one has no opposition, they don't need my vote anyway.  I"ll skip them.  but, for now, I'm away from this "ask your doctor" box!!!
Feb 4, 2014 11:46AM
I would use something like 22 times my SPENDING, not 22 times the income I'd like to have.  They aren't the same thing.
Feb 4, 2014 10:50AM
with the cost of living so high, people are lucky if they can save 2% muchless 22%..I agree this article is pointless.
Feb 4, 2014 10:36AM
"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"

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.
Feb 5, 2014 8:36AM
Running the same article again MSNBC ...  What do we need to see this 22 time ?
Feb 4, 2014 11:55AM
Your earnings do not stop when you retire if you keep monies you will not need on short notice earning a decent return. Your situation and needs will be unique.
Feb 5, 2014 11:44AM

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.

Feb 4, 2014 8:52AM
How do we save money when the banks keep stealing our savings and pensions?  Am  I the only one who sees the irony in that the biggest thieves on  the planet are the same ones who get to say who is credit worthy?
Feb 5, 2014 12:21PM
MYRA? What a joke! Just proves that this President doesn't have a clue of what the real problems are now.  JOBS JOBS JOBS!!  And not jobs that are paying less than 10 years ago! 

Feb 5, 2014 11:53AM

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.

Feb 5, 2014 12:05PM

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.

Feb 5, 2014 1:41PM

I hope people realize that the MY part of myRA           

MY = Obama 

not you or I

Feb 5, 2014 5:38AM
Feb 5, 2014 11:48AM
Oh, well, I'm back on and the first thing I hear this morning is an "ask your doctor" ad !  Does anyone know how to start a petition asking CONgress to make these ads illegal?  Would anyone want to start a petition?  I would like to sign it.  I believe most of us havefriends or  realtives in cemeteries that should be with us and would be had it not been for legal drugs. We once had free television that was paid for by merchant advertising.  Now, we have to pay for television and the merchants still pay to advertise.  I wonder if we all dropped our subscription, if it would make any difference.  Or, would Obamatelevision kick in and force us to pay for television and have proof we watched 300 "ask your doctor" ads each week. My wife loves some programs so I put up with it.  For myself, I wrould rather not waste the electricity.
Feb 5, 2014 1:03PM
How are people expected to save more when their insurance costs have gone thru the roof, their work hours are being cut by companies because of oblahblah care, and the cost of living is out of this world?
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