Growing up, my father would sometimes sit me down for a "Come to Jesus" talk when he noticed that I was beginning to head down a path that could really screw up my life. These talks were rare but deadly serious. I took them seriously because I knew my dad only called them when he was absolutely certain he was right that I was in danger.
Well, it's time to have a non-sectarian but no less serious talk about your ability to retire with anything approaching dignity.
According to a new study, the vast majority of Americans are saving little or no money for their old age but, for some reason, believe they will be just fine in retirement.
People, this is insane. Nuts. Crazy. It frightens me that a majority of Americans are delusional on an issue that will someday have such control over their lives. It wouldn't be so bad if these people had said, "I know that I'm not saving enough, but that's O.K. because I'm going to live fast and die young." I'd even be happy if they said, "I know I'm not saving enough but I'll just work into my seventies and take a huge cut in my standard of living at retirement."
They may not be the best plans I've ever heard, at least they acknowledge the reality that people aren't saving enough.
According to the Employee Benefit Research Institute's annual Retirement (EBRI) Confidence Survey, almost a third of workers have not saved for retirement at all, about 40 percent are not saving currently and 45 percent have less than $25,000 in total savings and investments (excluding their home).
But many Americans are not worried. For instance, about half of workers who haven't saved at all are at least somewhat confident they'll have enough money to retire. Some of the reason for this optimism stems from the mistaken belief by many workers that their employer will take care of them in retirement. About half of the 1,000 workers surveyed expect they or their spouse will receive a traditional pension, despite the fact that very few workers are covered by these plans.
Basically, if you don't work for the government, your company almost certainly doesn't offer a traditional pension plan -- and gay and lesbian couples certainly can't be counting on spousal benefits from government or private sector pensions. What that means for most of us is that we're on our own for retirement. Social Security will provide at most the equivalent of about $16,000 a year -- and that's assuming the government fixes the program's crumbling finances.
Let's say you're earning $60,000 a year and would like to retire and maintain your standard of living. Usually, retirees find that they can cut some of their expenses after leaving work, such as commuting costs and clothing. That means they can live off of 70 percent to 80 percent of their pre-retirement income without lowering their standard of living.
As a result, you will need about $45,000 a year in retirement. Social security will provide about $15,000 a year, so that leaves you with a shortfall of about $30,000. So how much will you need to save to provide $30,000 a year for 20 or 30 years of retirement?
Most financial planners -- including myself -- believe that you can safely withdrawal five percent of your nest egg each year -- any more and you could find yourself broke in your seventies. That means you'll need about $600,000.
(For those younger workers out there, remember that the $600,000 figure is for someone retiring today. If you're earning $60,000 but not expecting to retire for another 25 years, you can double that nest egg goal to about $1.2 million to keep up with inflation.)
In 2002, the average 401(k) account had about $40,000, according to EBRI. People in their fifties and sixties had average account balances between about $80,000 and $100,000. Not bad, but not $600,000 either.
Instead of being confident in their ability to retire, these people should be hitting the panic button -- hard. Under our 5 percent withdrawal rate, if you have $100,000 saved, you'll be able to pull out about $5,000 a year. Add that to your Social Security income, and you'll be forced to live off of $20,000 a year.
Hello, cat food. Of course, there's always an opening at Wal-Mart for entrance greeters.
To avoid this fate, financial planners offer people saving for retirement a simple rule that works pretty well: If you start saving in your twenties, you'll need to put away about 10 percent of your income until your reach retirement at age 62. If you start in your thirties, you'll need to save 20 percent. In you forties, you'll need to save 30 percent. If you get started any later, you simply will not be able to make it.
And if you think this sounds harsh, just imagine trying to live on $20,000 a year.
Mark Helm is a personal finance writer and financial planner. He can be reached at HelmFinancial@aol.com.