Will you sink or float on Golden Pond?
Right now might be the perfect time to take
a look at your retirement nest egg.
How much have you saved? How much will you
need? When will you retire? Will you retire?
Maybe it's a long way off; maybe it's just around
the corner. Whatever your stage of life, financial advisers unanimously
agree on one point: The sooner you start saving toward what you'll
really need, the better your chances of actually reaching your goal.
"People come to me thinking, 'I have a half
a million dollars, I'm fine,' and I'm the one who points out to
them that they're really not," says Barry Katz, Certified Financial
Planner with Caratel
Financial Services Inc. of Sunrise, Fla. "It comes down to maintaining
a lifestyle. Sometimes they'll have to cut down on their retirement
expenses or take a little more risk in their portfolio to make it."
What you'll need to "make it" is entirely relative,
of course. Most financial advisers agree that whatever your income,
you'll need roughly 70 percent of it annually before heading out
to Golden Pond.
But barely half of us (53 percent) have even
taken the time to figure out what our retirement goal should be,
according to the 2000 Retirement
Confidence Survey conducted by the American Savings Education
We're among the world's worst nations when it
comes to personal savings, so it should come as no surprise that
our retirement coffers are not exactly flush, says Keith Leggett,
senior economist with the American Bankers Association.
"Most Americans are not saving enough for retirement,"
he says flatly. "I think they are underestimating their needs for
Measure the hole in your boat
try something really scary? Calculate your nest egg based on your
current rate of saving.
50, they each make $40,000 a year. After raising two kids, they
have $100,000 in home equity, they each contributed $2,000 a year
to an individual retirement account during the past decade and they
each can expect annual Social Security payments of $12,500.
Most financial experts estimate they'll need
70 percent of their current annual income each year to maintain
their standard of living. They plan to retire at age 65 and estimate
they'll live to enjoy a bucolic 22 years on Golden Pond.
First, let's check out Fidelity
Investment's retirement calculator. In order to reach their
retirement goal of $56,000 a year (70 percent of their current gross),
assuming an inflation rate of 4 percent, a pre-retirement rate of
return of 8 percent and a post-retirement rate of return of 7 percent,
Bob and Betty are going to come up short.
maintain their lifestyle, they're going to need $494,044 in today's
dollars. At the rate they're saving, they're going to end up with
just $152,132, a shortfall of $341,912.
reality check: they'll need to find a way to tuck away roughly $17,075
a year, nearly a quarter of their combined income, if they want
to stay afloat on Golden Pond.
look at it a different way. Maybe if we consider Bob and Betty separately,
they'll fare better.
the American Savings Education Council's Ballpark
Estimator, we ran the Applebees through individually. It assumes
a constant real rate of return of 3 percent after retirement.
being equal, they'll each need a nest egg of $254,199. At the rate
they're going, they're each going to come up $222,199 short. To
reach Golden Pond, they're each going to have to find a way to set
aside $11,554 a year -- more than a quarter of their salaries.
Now you try.
(In addition, you may want to check out the
Security Administration's retirement calculator to determine
your exact retirement income.)
In the know vs. in the dark
OK, that was tough. If you're like most people,
you came up with really scary numbers. Six-digit scary. Booooo!
You have also just increased your chances of
According to ASEC's 2000 Retirement Confidence
Survey, those who have tried to calculate how much they will need
for retirement are better off financially than those who have not
done the math. The survey found that 88 percent of those who have
done the calculation are actively saving for retirement vs. 61 percent
of those who have not. Those in the know also have saved a median
$66,500; those in the dark have saved just $14,000.
"More Americans are saving every year, but in
general they are not saving enough," says ASEC President Don Blandin.
"People are saving, but they are saving blindly, simply trusting
that they're putting in enough without really knowing how much they
need to save to best prepare for the future."
The way we retire today
Granted, we didn't give the Applebees credit
for the equity in their house, the major form of saving for most
American families. Some would even argue that their home is their
nest egg, and may expect it to appreciate say fifty- or a hundred-fold,
just as their parents' did, by the time they retire.
Don't bet on it, warns Leggett.
"During the 1970s and 1980s, you had a lot of
asset price appreciation in real estate values and they rose much
more rapidly than the rate of inflation," he says. "This really
did improve the financial lot of the World War II generation. You
are not seeing the same type of appreciation in housing prices today.
To count on that appreciation is not necessarily a good gamble.
In fact, in some areas, housing prices might actually fall."
If the value of your house appreciates enough
to offset property taxes and inflation, great. If it exceeds them,
even better. But for the foreseeable future, there is little chance
that you'll see an increase in value sufficient to single-handedly
support you in your golden years.
Nor will pensions be there to bail out most
of us. In today's work force, few workers will stay with one company
long enough to earn one even if it's offered. That's why it's so
important to max out any 401(k) programs your employers offer. And
be sure to roll your balance into your next employer's plan when
you move on. Remember: You are building your own pension. The sooner
you start, the more help you'll get from accrued value, whether
in equity performance or compound interest.
Oh, one more thing: Don't look for help from
the kids. Experts predict they'll have even less money than you
do, and in all likelihood it will have to take them further.
Don't retire -- repackage!
It doesn't surprise Ruth Hayden that most Americans
are more likely to sink than float on Golden Pond.
Hayden, a financial
educator and author of For Richer, Not Poorer: The Money
Book for Couples, spends much of her time teaching financial
planners the new realities of retirement.
Simply put, the challenge we face is not the
money, it's longevity.
"People are still going by the old model where
people retire at 65 and die at 68," she says. "As a female, if I
get to age 50 without heart disease or cancer, I'm probably going
to live until I'm 93. Very few people are going to be able to sustain
themselves financially, mentally, emotionally, physically for a
third of their life without anything. What, you take that trip you've
saved for, you clean out the closets, you clean out the garage and
then you wait to die?"
Hayden's got bad news and good news regarding
the new retirement.
The bad news is, you're going to need to maintain
100 percent, not 70 percent, of your current income, and maybe a
bit more to cover health care costs, to retire. The good news is,
with a little ingenuity, you'll still be earning well into what
your parents considered retirement years, working a comfortable
pace at second and even third careers that feed your life instead
of drain it.
Hayden's model for the new retirement may take
some of the pressure off.
Divide the last third of your life into three
sections: 60-70, 70-80 and 80-90. From 60 to 70, you still need
to accumulate money or at least realize enough from investments
to save money. From 70 to 80, you don't need to accumulate but you
can't touch the principal. From 80 on, you call the shots.
"The trade-off here is we're going to live longer
than our parents or grandparents," she says. "The challenge for
us is in how we adjust to our longevity. The key to retirement is
taking the part of what you do right now that is marketable and
put it into a package that is easier and more fun, whether it be
telecommuting, working two days a week or job sharing to mentor
Oh well, you probably weren't going to fish
every day on Golden Pond, were you?