When it comes to retirement, no nest egg is ever too big.
But with an economic crisis draining the life from 401(k)s, IRAs and pension plans, a lot of people are asking themselves if they can still afford to retire early, on time, or at all.
Individuals “can still set any goal they want,” says author and economist Ben Stein. “The question is, can they get to it?”
In recent years, it wasn’t unusual for investors to recoup 8 percent or 9 percent annually from their retirement accounts, he says. “Those predictions are now off the table.”
Now, our nation’s financial predicament has many challenging the assumptions they’d made about retirement.
“The real question is if retirement as a whole is still relevant,” says Stein, author of “How to Ruin the United States of America.” The recent economic crisis “has put a crowbar into people’s retirement planning,” he says. And it “calls into question whether a whole generation of Americans can retire. The result is that all bets are off.”
3 steps to control
Three things you can do to take control of your retirement: Find a job you truly love and retire later; save more for retirement; and maintain a more modest standard of living, Stein says.
And while you may choose to alter your plans or your investment strategy, the important thing is to keep saving. “You really should be maxing out whatever retirement plan you have at work because you’re going to need it with this crazy economy,” says Karen Altfest, CFP, vice president of L.J. Altfest & Co., a New York-based fee-only financial planning firm.
“Pay attention to it,” says Ric Edelman, author of “The Lies about Money.” “Retirement,” he says, “will be here before you know it.”
Drew Tignanelli, president of the Financial Consulate, a Maryland-based planning firm, agrees. “Unless you believe the world’s coming to an end, you should keep putting it away,” says Tignanelli, a CFP and CPA.
That doesn’t mean closing your ears to what’s going on or reacting to every bit of “breaking” news you hear. “Getting scared sets the tone to make mistakes,” he says. Instead, it’s a good time to sit with a neutral professional (one who doesn’t make a cut from moving your money around or selling certain products), and hammer out your best long-range strategy.
“There are unique periods of time where you need more active management,” he says. “This is one of them.”
Is there a magic number?
Can you really set a goal for your retirement balance sheet? That depends on your adviser, your mindset and where you are in life.
“I don’t know if there is a magic number anymore,” says David Bendix, president of the Bendix Financial Group. “Try to save as much as possible as early as possible.”
Ed Slott, CPA and author of “Your Complete Retirement Planning Road Map,” agrees. “The problem with numbers is that nobody in their 20s or 30s knows the number,” he says. “Even in (their) 50s, people don’t know the number.”
And even if you did, looking at what will likely be such a large number early on “can take the wind out of your sails,” he says.
Instead, the trick is to make saving a habit. “All you can do is put away as much as you can, be consistent with it, and you’ll be fine,” he says. “Be consistent and pay yourself first.”
But not all advisers agree with the concept of saving without a finish line in mind. “You’d better have a goal,” says Tignanelli. Toward that end, ask yourself where you want to retire, and what do you want to do in retirement, he says. Then look at the income you’re likely to need, the account balance you need to achieve that and your risk tolerance.
However, as many retirees are discovering, plans change. Many retirees are postponing retirement or are working part time, either for health insurance benefits, financial necessity or because they enjoy it.
These days, many people are “realizing they might be working into their 70s,” Bendix says.
“People aren’t thinking 65 anymore,” he says. “The landscape has changed.”
Doing the retirement math
Here’s one “quick and dirty way” to get to the number, says Peggy Cabaniss, CFP, president of HC Financial Advisors in Lafayette, Calif., and past chairman of the national board of the National Association of Personal Financial Planners. Calculate — in today’s dollars — how much you’ll need each year to live the way you’d like in retirement. How do make that estimate? “Most people are going to be living on 70 percent of what they have now,” says Altfest. “It’s a perfectly good rule to follow.”
Once you have that amount in mind, build in a cushion for emergencies, vacations, out-of-pocket medical expenses, etc., suggests Cabaniss. Next, subtract what you’ll receive annually from Social Security and any pension plan you might have. You can use Bankrate’s Social Security benefit calculator to estimate your future benefits.
Finally, divide the remaining amount by 4.5 percent — figuring that you can take, on average, 4 percent to 5 percent a year from your retirement nest egg.
The final figure represents the approximate “pot of money” you’ll need to be able to withdraw your desired income over the long term, she says. You can also use Bankrate’s retirement planning calculator and Bankrate’s investment goal calculator to help clarify your retirement scenario.
Also be aware that the current economic situation has altered some of the long-established norms used in retirement planning.
Two big numbers that will impact your retirement nest egg: rates of return on your investment and rates of inflation. For a historical inflation average, many financial planners are using numbers ranging from 2 percent to 4 percent. And, for rates of return, they are generally looking at numbers ranging from 4 percent to 8 percent.
And historically, there’s a relationship between inflation and return, says Tignanelli. Typically, he uses a 2-to-5 ratio, figuring if inflation is 2 percent, clients can likely get a 5 percent return on their money. But “right now, we’re in an unusual period — I don’t know that it’s happened before,” he says. “The rate of inflation is higher than the return.”
As a result, “I’ve been telling every client in the past six months to be at least 50 percent in the safest thing you can find and invest the other 50 percent,” he says.
Stein, who believes the stock market will rally, advises a similar philosophy. “Go back to the old saw of having roughly equal amounts in U.S. Treasury bonds and stocks,” he says.
The third big number you want to analyze is the amount of money you will be withdrawing every year. The range here tends to be tighter — from 4 to 5 percent — but that varies with the individual, too. It also depends on your life expectancy and whether you want to leave any money to your children, says Edelman. But “most people will fit 4 (percent) to 7 percent,” he says.
And not all retirement account balances are created equal.
But the most important thing, no matter where you’re putting the money, is to keep putting it away somewhere. “The biggest hurdle in these times is starting to save,” he says. “Too many people are not doing anything.”