Retirement litmus test

[moneybags]

I don't see a problem in including your company's match. It is money you are saving.

[disneysteve]

I don't see a problem in including your company's match. It is money you are saving.

No it isn't. It is money somebody else is saving on your behalf. That is not exactly the same thing.

[disneysteve]

No it isn't. It is money somebody else is saving on your behalf. That is not exactly the same thing.

To elaborate, let's say you and I each earn 100K.

I save 15% of my income and get no match.
You save 0% but your very generous employer puts 15% in for you.
So each of us has 15K/year going into our retirement accounts.
In 30 years, with identical investments, we will each have about $2.3 million.

Now comes the difference - retirement income.

I have spent my life living on 85% of my income or 85K.
You have spent your life living on 100% of your income or 100K.

If we each draw 4% from our accounts, that will give us $92,000/year of income.
That's great for me since I'm used to living on $85,000. I get a raise in retirement. Sweet.
You, however, get an 8% pay cut since you are used to living on $100,000.

[Petunia 100]

To elaborate, let's say you and I each earn 100K.

I save 15% of my income and get no match.
You save 0% but your very generous employer puts 15% in for you.
So each of us has 15K/year going into our retirement accounts.
In 30 years, with identical investments, we will each have about $2.3 million.

Now comes the difference - retirement income.

I have spent my life living on 85% of my income or 85K.
You have spent your life living on 100% of your income or 100K.

If we each draw 4% from our accounts, that will give us $92,000/year of income.
That's great for me since I'm used to living on $85,000. I get a raise in retirement. Sweet.
You, however, get an 8% pay cut since you are used to living on $100,000.

Except there are no FICA taxes to be paid, so the person who was living on 100k minus 7.65k is now living on $350 less per year.

I do understand your point, though. It is certainly something one must take into account when crunching their own numbers.

[LivingAlmostLarge]

Then the person saving 15% gets an even bigger raise

but seriously if you are used to living on the whole paycheck the problem will be if in retirement medical bills are larger or premiums or anything turns up you will have very little built in cushion.

Of course people will argue in retirement in theory you won't need as much because you won't have a mortgage.

I want to see what retirement looks like when the majority of the US is not covered by a traditional pension but instead a 401k. I ask because most people in their 60s still had pensions.

[disneysteve]

I want to see what retirement looks like when the majority of the US is not covered by a traditional pension but instead a 401k.

I'd like to see that too because it would mean that the majority would have a 401k. Today, only about 47% of workers have a 401k available to them. Less than 10% have a traditional pension. That leaves 43% with neither a pension nor a 401k.

[moneybags]

To elaborate, let's say you and I each earn 100K.

I save 15% of my income and get no match.
You save 0% but your very generous employer puts 15% in for you.
So each of us has 15K/year going into our retirement accounts.
In 30 years, with identical investments, we will each have about $2.3 million.

Now comes the difference - retirement income.

I have spent my life living on 85% of my income or 85K.
You have spent your life living on 100% of your income or 100K.

If we each draw 4% from our accounts, that will give us $92,000/year of income.
That's great for me since I'm used to living on $85,000. I get a raise in retirement. Sweet.
You, however, get an 8% pay cut since you are used to living on $100,000.

I can't argue with your numbers, but at the end of the day, both savers have the same amount of money. I don't need a raise in retirement; I need enough money to cover my expenses, not a specific income number.

I'd like to see that too because it would mean that the majority would have a 401k. Today, only about 47% of workers have a 401k available to them. Less than 10% have a traditional pension. That leaves 43% with neither a pension nor a 401k.

I'm afraid it will not be pretty. Here's an article with some 401k stats. I think a lot of people will be running out of money.

http://money.msn.com/mutual-fund/401k-balances-hit-record-highs

[disneysteve]

I can't argue with your numbers, but at the end of the day, both savers have the same amount of money. I don't need a raise in retirement; I need enough money to cover my expenses, not a specific income number.

True. Certainly that's the goal - to cover your expenses. My point is just that the person who spent his whole working life with lower expenses (because a higher percentage of income was being saved) is going to be better positioned in retirement than the person who lived with higher expenses (because less income was going toward savings). The latter person may need to trim lifestyle more in retirement than the former person.

[disneysteve]

I'm afraid it will not be pretty. Here's an article with some 401k stats. I think a lot of people will be running out of money.

http://money.msn.com/mutual-fund/401...t-record-highs

Articles like this (by their own admission in this case) can be very deceiving. Just looking at 401k balances doesn't tell the whole story.

My wife has a whopping 42K in her 401k and is almost 50 years old. Sounds bad, right? Well the reason for the low balance is it was only a part time job, 2-3 days/week, and she was only there for 5 years (and I think she wasn't eligible to contribute in the first year as I recall). So folks like her throw off the averages. Besides, for 11 of the past 18 years, she was a SAHM.

You need to look at the big picture. Between the two of us, we have about $600,000 in investments, more than half is not held in retirement accounts. So just looking at 401k averages really tells you very little.

[Reggie]

I'm so worried about retirement that I can't even think straight. My plans went up in smoke when I got divorced so I am scared to death of being an old lady eating cat food.

[Petunia 100]

I'm so worried about retirement that I can't even think straight. My plans went up in smoke when I got divorced so I am scared to death of being an old lady eating cat food.

That does happen to a lot of us. Divorce changed my financial situation quite drastically, too. Still, what choice do we have but to plan and save as best we can? Best of luck to you, Reggie.

[moneybags]

Articles like this (by their own admission in this case) can be very deceiving. Just looking at 401k balances doesn't tell the whole story.

My wife has a whopping 42K in her 401k and is almost 50 years old. Sounds bad, right? Well the reason for the low balance is it was only a part time job, 2-3 days/week, and she was only there for 5 years (and I think she wasn't eligible to contribute in the first year as I recall). So folks like her throw off the averages. Besides, for 11 of the past 18 years, she was a SAHM.

You need to look at the big picture. Between the two of us, we have about $600,000 in investments, more than half is not held in retirement accounts. So just looking at 401k averages really tells you very little.

I totally agree that this (and similar) article does not tell the whole story. I had a 401K at a job for 10 years and a Simple account with my next job for 10 years. The balances from both of those accounts now reside in an IRA, so my data would not show in the article. I just linked the article as a small example of how many people are saving, or not. When it comes to retirement, my gut feeling tells me that many people are just not saving enough, if at all.

[disneysteve]

When it comes to retirement, my gut feeling tells me that many people are just not saving enough, if at all.

I agree completely. I think many people are not saving nearly enough. I just worry sometimes that articles like that might do more harm than good. They might scare people off and make folks think the situation is hopeless. Telling folks they need to have 25 times income, the standard rule of thumb, is overwhelming to a lot of people. My father didn't retire with anywhere near 25 times income. He lived fine until he died and my mother is still living just fine years later on the nest egg they did build. The "secret" is that they always lived well below their means, they didn't have a fancy lifestyle filled with exotic travel and the latest gadgets. If people would learn to live on less, achieving a comfortable retirement would be far easier.

[Reggie]

25 times your income is insane. That is over 3 million just for my income. I think you have to take into consideration how much less expensive retirement living is. No college expenses, work expenses, other child related expenses like day care and clothing. I just worry about health insurance. I save as much as I can and hope its enough. I'm 39 years old now and have $290 k in my 401. I'm not even close to that 3 mil mark. Sigh

[Petunia 100]

Fidelity recently made public their advice to aim for eight times final income saved. That seems dangerously low to me.

http://www.cnbc.com/id/49031856

My own mother never saved a penny inside any retirement fund yet has had a comfortable retirement thus far (she will soon be turning 81). She has a modest paid for home and low expenses. All of her savings are in cash, CDs, and T bills. She still does not spend any of her interest, but lives on her SS benefits. She aims to add to her savings a bit each month. I have been trying to talk her into loosing her purse strings a bit. I feel she can spend all of her SS benefits, her interest, and dip into her principal a small amount each year. She and I did recently take an Alaskan cruise, her first ever, so she is beginning to realize that she can afford to spend a little.

People like my mother do skew the results of this type of survey. Still, I think millions of American people will spend their golden years in poverty after a lifetime of hard work.