Passions ignite about retirement readiness

Saturday, Feb. 20
Posted 8 a.m. EST

It seems that people are passionate about the topic of retirement readiness.

My recent blog about the National Retirement Readiness Index designed by retirement consulting firm Fiduciary Benchmarks prompted a response from readers. A few cried foul at the example cited of the 45-year-old with $50,000 saved whose nest egg eventually grew to $670,000 by age 67. Tom Kmak, CEO of Fiduciary Benchmarks, did the calculation, assuming an annual deferral rate of 8 percent of his $41,334 pay, an employer match of 60 cents on the dollar, and an annualized return of 8 percent.

Assumptions too rosy

Says Joel Grumm of Grand Rapids, Mich.: "How realistic is an 8 percent deferral, 8 percent returns, a 60 percent employer match, along with real income growth to sustain it all for the next 20 years?" Grumm says he defers more than 8 percent in his own retirement account, "but never got a match that large nor achieved an average 8 percent. Additionally, income has declined rather than grown and health care 'cost sharing' further reduces an opportunity to increase the deferral rate. Show me these opportunities before you tell me how great my retirement will be."

I take responsibility for not pointing out that the assumptions used for that calculation reflect a best-case scenario that may not be easily duplicated in reality. It's true that the 45-year-old with $50,000 squirreled away would have had to suddenly "get religion" and begin saving regularly for the remainder of his or her career. It's also true that matching funds of 60 percent are not widespread; more commonly, companies offer a 50 percent match on 6 percent of pay, or 3 percent altogether -- and some companies don't provide a match at all. On top of that, it assumes no interruption in employment and a steady 3 percent raise each year, matching the inflation rate. As for the 8 percent return, it may seem preposterous after the lost decade we've been through, but as historical returns go, it's not that out of line.

Kmak points out that the real return (meaning after inflation) of the S&P 500 for the decade of the depression (starting Jan. 1, 1929) was negative 1.4 percent. But the real return for the 25-year period following that decade was 12.94 percent.

Historically, the stock market has been the place to put your long-term money, but after the two recent bear markets, it's become a scarier place, and it's hard to imagine outsized returns. Of course, there's no way of knowing for sure if the stock market will continue to bear fruit for investors. But 8 percent is not unreasonable.

Americans not at all ready

Jane White, founder of Retirement Solutions and author of "America, Welcome to the Poorhouse," also wrote to me. I had blogged about her book recently. She questioned the assumptions used in the example above. In addition, she adds, "The actuarial rule of thumb for readiness is having a minimum of '10 times final pay,' or your salary at retirement, in your 401(k) and rollover accounts as you reach retirement age. Given that the median income for 65-year-olds is $65,000 and the median sum at retirement is only around $110,000, most Americans have accumulated a little under 20 percent of what they need."

For his part, Kmak defends his math and disputes the 10-times-pay rule of thumb. "Per the 2009 Aon Consulting/Georgia State University Replacement Ratio study, an individual retiring today who has historically made $20,000 will have 69 percent of their income replaced by Social Security. By contrast, someone making $150,000 will have only 23 percent of their income replaced by Social Security. Thus, the rule of thumb cannot be right for both cases. This is why we built the Retirement Readiness Index. It is much superior to simplistic rules of thumb."

As I said, passions get ignited about these matters. The most dangerous position to assume, though, is complacency. To see if you're on track, contact an unbiased financial adviser.

In the meantime, check out Bankrate's Retirement shortfall calculator.

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