How do you achieve retirement security in a time of uncertainty? It feels hard to do even rudimentary retirement planning when you don't know how much money you'll have to work with or how much it will actually take to continue to live comfortably when you're not working.
Doug Carey, owner and principal of the retirement planning firm WealthTrace, published a piece this morning on SeekingAlpha.com that analyzed a 50-year-old couple's financial situation. He concluded that if they put half their $500,000 retirement savings in equities and half in short-term Treasury bonds, by age 60, when they hope to retire, the money will have grown to $665,000, given a realistic 6 percent return on equities and 2 percent return on Treasuries. If the couple does retire at that age and plans to live on $30,000 from Social Security and $20,000 from savings, they'll run out of money at age 79.
But Carey points out that if the couple takes all of their money out of Treasuries and puts it into equities, including stocks that pay high dividends, they have a shot at increasing their return to the extent that he calculates they won't run out of money until they turn 103.
But is putting all your money in stocks a risk you can live with? For many people, that's an indigestion-producing scenario.
With Carey's analysis in mind, I read the white paper that Prudential Financial circulated earlier today with considerable interest. In it, it offered three steps to retirement security. Simplistic, but reassuring because these steps are doable and not at all risky. Here's Prudential's advice:
Save with the goal firmly in mind of having enough money to live on. The amount of savings you need is very personal. You need less if you are one of the lucky people with an old-fashioned, defined benefit pension. If you got an inheritance, a settlement or hit the lottery, maybe you don't have to salt away so much. But most of us need to save enough that we can replace at least half of our incomes with money from our savings. That's a number you can calculate or get a financial adviser to calculate. You can always change it later, but at least you have a starting point.
Look for ways to create guaranteed income besides Social Security, a sum of money that arrives monthly for life. Again, if you have a pension, this is less of an issue. But these days, most people don't, so Prudential says people should at least consider an annuity or a target-date fund with a minimum withdrawal benefit. Prudential predicts there will more guaranteed income options available soon because the demand for them is so great.
Maximize Social Security. Contrary to the simplistic advice offered frequently, this may not mean waiting until you are 70 to claim. Couples and those who were formerly married have a lot of options in how they claim Social Security. There are a number of very sophisticated calculators available that will help you figure how to get the most money. These calculators are generally not free. Social Security doesn't offer this kind of help, but your financial adviser should have access to one. Prudential also points out that because Social Security gets preferential tax treatment under current laws, optimizing it can have an additional payoff in tax savings.
One things for sure, if you're going to live well in retirement, you have to plan aggressively. You can't just sit home and wait for the checks to roll in.