finance

Is your retirement plan on track?

Baby boomers between the ages of 41 and 54 have typically accumulated a nest egg of $30,000, and are contributing $187 monthly to their retirement funds, according to the Fidelity survey. Meanwhile, 14 percent in that age group haven't started saving at all.

The typical pre-retiree household (age 55 and up) has $60,000 saved up and contributes $229 a month. And 11 percent of folks in this age group haven't begun saving for retirement at all. Are they expecting to get run over by a truck?

How much to set aside?
There's no quick answer to this question. It all depends.

The rule of thumb among planners is that you need to set aside enough to replace 75 percent of the income you earn just before you retire. But this rule doesn't always apply. If you earn, say, $150,000 or more a year, you might get by with an annual income of $75,000 -- or 50 percent -- during retirement. But if you earn $35,000 a year, you might want to draw an income equal to that in retirement.

It also depends on what you expect your expenses will be. If you finish paying off the mortgage the month before you retire, that's a big weight off the monthly budget.

Retirement calculators abound on the Web that can help you calculate your nest-egg goal. Let's say you and your spouse want to have an annual income of $60,000, you plan to retire in 15 years, and you expect to live 25 years after you retire. Assuming an annual inflation rate of 3 percent and annual earnings of 7.5 percent on your money, you would need $1,466,388, (the equivalent of $495,589 in today's dollars), according to Bankrate's retirement savings calculator. Then, over the years, the account balance will shrink as you withdraw the money until you hit a zero balance in your 25th year of retirement.

I don't know about you, but that goal of $1.5 million seems onerous to me.

If you don't have $495,589 saved up yet (and it looks like most boomers don't), then you need to use the 401(k) calculator, which takes into account your current level of savings and then figures out how much you need to save annually to achieve your goal of $1.5 million.

What? You say you need to squirrel away most of your current income to meet this goal? Well, according to conventional wisdom, you need to make adjustments to get the numbers to jibe. Maybe you're not taking into account your home equity; it might make sense to downsize to get your living expenses down. Or maybe you didn't take complete inventory -- forgetting to take into account your spouse's retirement savings or pension plan. Or maybe you just need to reduce your retirement-income expectations, or maybe work right on into your 70s.

Doesn't sound like a good plan to you, right? In fact, maybe it's not necessary to beef up your savings or work later than you planned, says a lone voice in the financial planning field. Current retirement calculations are fundamentally flawed, according to Ty Bernicke, a certified financial planner. His method of calculation requires a lower nest-egg amount upfront, and instead of shrinking to nothing after 25 years, the retirement account balance can actually grow considerably, he contends.

Reality retirement planning
Bernicke says financial planners routinely overestimate their clients' retirement needs, in an article that appears in the June issue of the FPA Journal.

Traditionally, financial planners factor in inflation to come up with annual retirement withdrawals that increase with each passing year. But these calculations don't take into account a very important trend: Retirees tend to spend less on most things as they get older.

Bernicke noticed this trend among his own clientele, and decided to see if national statistics supported his observations. In fact, a recent consumer expenditure survey released by the Labor Department's Bureau of Labor Statistics confirmed his suspicions.

In all categories (except, notably, health care), annual spending declined among older retirees. Those in the 65-to-74 age group spent 27 percent less on such things as clothes, entertainment and food than retirees in the 55-to-64 age group. And the 75-plus age group spent 26 percent less than the 65-to-74 age group. These reductions in consumer spending were voluntary, he says, a fact borne out by an analysis of the net worth of households in each age group. Median net worth increased with age at all income levels.

Bernicke calculates how long a nest egg of $800,000 would last using traditional retirement planning techniques vs. his "reality" retirement planning approach. He uses the same set of assumptions for both scenarios, with one important exception: The reality approach assumes reduced-withdrawal amounts that correspond with the reduced-spending patterns of older retirees.

So a married couple begins retirement early -- at age 55 -- with a $70,000 withdrawal in year one. Social Security, under this scenario, kicks in at age 62 with $1,000 for each spouse per month, increasing 2 percent annually. They expect to live 30 years and earn 8 percent on their nest egg of $800,000.

Under the traditional approach, they run out of money by age 80. Under the reality approach, at age 85, their nest egg has grown to nearly $2.4 million.

I don't know about you, but I like the reality version a whole lot better than the traditional one. OK, so does this mean you should be lulled into a false sense of security about saving for retirement? Absolutely not. There's a huge disparity between having $60,000 saved up and $800,000, which, of course, is not the right goal for everybody. And unexpected medical problems that require long-term care or a major expenditure will render most calculations meaningless.

Obviously, figuring out your retirement needs is more art than science. But I find it both reassuring and disconcerting, if these feelings can coexist, knowing that we have quite a bit of wiggle room when calculating our retirement needs.

Longtime financial journalist Barbara Mlotek Whelehan earned a certificate of specialization in financial planning.

If you have a comment or suggestion about this column, write to Boomer Bucks. If you have a particular financial problem that you would like addressed, please send your queries to Dr. Don, Tax Talk, the Real Estate Adviser or the Debt Adviser.

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