A Retirement Wake-Up Call

Article originally published April 2011

By Todd Washburn, CFP^®

In early to mid-March of this year the Associated Press and LifegoesStrong.com surveyed Boomers (born 1946-1964) about their financial preparedness for retirement.  I found some of the results disheartening if not a little disturbing. 

·   Only 11% are “very confident” they will have the financial resources to live comfortably in retirement.

·   44% are either “not too confident” or “not at all confident” they’ll live comfortably.

·   The median (50% above, 50% below) amount saved by Boomers for retirement is about $50,000, and of those 24% haven’t saved anything.

·   For those who have saved something/anything, the median amount saved is about $100,000.

·   Only 10% have $500,000 or more saved.

·   67% plan to work for pay in retirement with 35% saying they’ll need that income to make ends meet.

·   For 40% of Boomers, Social Security will be an “extremely important” source of income.

I could go on and pull out more and more statistics, but I think just looking at that list above should be enough to concern you.  What jumps out at me is that we potentially have a large group of people:

·   without adequate resources to live on

·   living longer

·   with fewer “stable” income sources (i.e. pensions)

·   facing possible cuts and/or changes in Medicare, Medicaid and Social Security

·   planning to need to work in retirement, while we know many won’t be able to do so.

Increased life expectancy and greater responsibility for self-funding of retirement may very well have created a retirement time-bomb. 

  Before we go any further, let me be clear about something:  This is NOT intended as a political commentary on what should/shouldn’t be done in the struggle to balance the Federal budget.  It IS intended to point out a potential social and economic problem that may just be beginning to manifest itself and is likely to become even more evident as Boomers retire or are forced to retire because of health reasons or loss of their job.

  There are no doubt a number of reasons for this situation.  For older Boomers in particular, retirement responsibility changed quite a bit over their working life.  Pensions were eliminated in many places, replaced by 401(k) plans.  This shifted responsibility for retirement income from the employer (defined benefit plan) to the employee (defined contribution plan).  For some this happened later in their career.  In most cases the change wasn’t accompanied by adequate education for the employee as to how to invest for a long-term retirement.  Many mistakes were made, from saving too little or investing too conservatively (all in CDs), to investing too aggressively and not understanding the risks (tech stocks).  This has created the very real possibility of people who were middle-class while working becoming poor while retired.

   If we could go back, what could workers have been taught that might have helped them save enough?   A partial list might include:

·   What’s important is real rate of return.  This is the what you get when you subtract the inflation rate from the return you get on an investment.  If you invest too conservatively, and the real rate is only 1% or 2%, you probably won’t make it.

 

·   Risk:  There are different types of investment risk:  inflation risk (too low a real rate of return so inflation eats the gains up), market risk (whole economy goes down), company/industry risk (i.e. putting all your retirement money in company stock- Enron for instance).  Folks would have understood you shouldn’t invest too conservatively, things do sometimes go down but you need to stay the course, and diversification and some regard for risk is a good thing.

 

·   The Rule of 72:  How quickly does money double?  Divide 72 by your investment return and the answer is the number of years, at that return rate, it would take to double your money.  If you want to account for inflation, divide 72 by your real rate of return.  i.e.  72 divided by a 3% real rate equals 24 years.  Your buying power will double in 24 years.

 

·   Withdrawal rates:  For many, Social Security and/or a pension will provide a large share of a person’s retirement income.  For others, income from their investments will be a larger share.  The question is, how much can you take out of your investments every year and not put yourself at great risk of running out of money?  Honestly, there isn’t an exact answer.  A rule of thumb, and a very general one at that and one with many potential caveats (which is another way of saying be careful if you don’t know the limitations of rules of thumb) is to take no more than 4-5% each year.  The real key is to realize that 10% per year is very unrealistic.  Yet many people think that.  At 10% per year and if you didn’t earn anything on that money (let alone lose anything), after 10 years that’s 100%.  You’re broke.

 

Would the above items have prevented the scary numbers at the beginning of this article?  For some maybe, but sadly not for all.  In every set of statistics there are stories that don’t get told.  Some people need every dime they make just to survive, so saving isn’t an option. For others, something happened to derail their efforts-  illness, injury or even divorce.  And sadly, some just never developed the discipline to follow-through on something as long-term as retirement savings.  But for those who tried, really tried, but made mistakes, the additional education and information might have helped.  The lesson is- pay attention, make a plan, get help if you need it, and be disciplined.  With that, hopefully you’ll be one of the 11% confident in their retirement.