Poll: How Much Do You Need to Save for Retirement?

I think you left out a very important difference between those of us over fifty and the next generation- pension. My husband receives almost $4000 a month in pension. Many of our friends have double pensions (husband and wife) amounting to over $7000. a month. With a defined pension and pension backup from the government we need to save much less.
Don’t worry- we took much lower salaries for many years to make up for the pension we currently get. IRA’s did not even start until half way through our working years.

in 25 years the stuff you pay for today will be twice more costly – due to inflation

Every retirement calculator I have seen (except for the one I developed myself!) gets the numbers wrong because it fails to account for the effect of the stock valuation level that applies on the day the retirement begins. The stock valuation level has a dramatic effect on the long-term return obtained from the portion of your portfolio invested in stocks. Unless you get that number at least roughly right, the entire plan is not likely to work.

Is there any reasonable person who would expect to obtain the same long-term return from stocks purchased at the prices at which they were selling in 1982 as he would expect to obtain from stocks purchased at the prices at which they were selling in 2000? FIRECalc and the other retirement calculators noted above do not consider this factor.

Rob

Lots of good links here.

There are no guarantees no matter how you cut it. Kids with their families can move back into your home, your health can take a turn for the worse, you can be in an accident, etc. So while you should plan reasonably and adjust as your life changes or as things become more probable for you, don’t kill your today worrying about your tomorrow. It’s like when the media drums up the cost of college being $250K for four years. Do you know anyone who actually paid that much out of pocket? Despite the horror stories, the bulk of people I know who’ve retired typically end up finding a way to live anywhere from very well to reasonably comfortable with very few horribly struggling and frankly, the few I know who are horribly struggling either had no plans or were run over by unplannable circumstances such that nothing they could have done would have helped. It may not be exactly what they all envisioned, but I suspect most people will find themselves in the boat of doing well to comfortable. The best part is that now we have many options of what retirement means, and hopefully they’ll be more for my kids when they take whatever version of “retirement” they choose.

I believe the best thing you can do for yourself is not have any debt when you retire. If you don’t owe anyone, you’ve got more choices of how and where you live. Additionally, if you’re only financially responsible for one or two people your necessary expenses with no debt are no where near what they were when you have kids in the house and debt.

I know plenty of retirees that have no savings. Most of them live off meager pensions and social security. Unless you have an extravagant lifestyle, you typically can get by on just those things if your housing is paid for and you are fortunate to not have a ton of medical maladies.

I think there is also a difference in the expectations of those close to retirement now, and those who are under 45.

My mom just retired at 67. She has well under $1 million and no pension, but she has a very reasonable expectation that she will be able to collect social security and access Medicare for the duration of her retirement.

Her children need to plan for a future which may not include Social Security or Medicare, or may require means-testing. Thus, we will start with less income and more expenses. We really need to save much more in order to achieve the level of retirement our mother will have.

My generation has been told for years that Social Security is going to run out of money before we reach retirement age. My guess is that this is the main reason we are pessimistic about retirement savings.

Yes, I agree with the last few comments. We don’t think SS will be around when we retire so we’ve planned accordingly.

There is a wealth of knowledge available, and thank you for compiling this information! And just as you said, the important thing is to take action, no matter how small, and begin today.

I think it’s possible to get by on whatever retirement holds in the future. The question is, how do you want your retirement lifestyle to be, and focus on how to attain that.

Hm… I chose 2 million also. My reasoning:
1. There are two of us, and I’m hoping DH will still be around and kicking. If it were just me I might be ok with something between 1 and 2.
2. I have a DC plan, not a DB plan. This, I know from the HRS and other surveys is a major difference– 65 year olds today don’t know what their DB plans are worth! (probably more than 1 million! The private annuity market sucks– you can’t buy a DB plan like older folks have, well you can but it’ll be expensive and they’ve already paid in the form of a lifetime of lower wages.)
3. I have a pretty high income now. The boomers on average have lower age adjusted wages than we do– because there are so many of them they keep down wages (according to a Boston Fed study)… if younger folks are considering the recession a blip, then they’ll be expecting higher real wages than the current generation, and possibly want more replacement income.
4. Even if I hadn’t misread the question we’d still need 2 mil, but I think I did misinterpret the question when I first read it on the survey… thinking either I’d have a higher income when I hit 65 or in 35 years there’s going to be a lot of inflation.
5. We younger adults have longer life expectancies. Our children may not, but we do.

Other thoughts: women today are more likely to give birth later– some people will still be paying for their kids’ college at 65.

I don’t think it’s necessarily attributable to pessimism. It is true that younger folks don’t believe in social security being around for them, but as someone who works in that area, I 100% am faithful it will be around. I just hope to be wealthy enough that it’s not going to replace a whole lot of my income. That’s optimism, not pessimism.

Though it is true that for any given event, older folks are more likely to be optimistic (they just have more negative events each year). (That’s psychology research from Berkeley and Stanford.)

(Also… our generation should not be planning to retire at 65! With our improved morbidity and mortality we should be able to put in more productive years in the labor force and still enjoy a reasonable retirement. It’s difficult to make that out of optimality calculation… risk aversion suggests to estimating higher rather than lower.)

Put me in the camp of those who think they can retire on less than a million. However, I’d still like to have more than a million! My approach is basically that we’ll be fine with significantly less, so long as a lack of affordable health insurance doesn’t throw a wrench into things. That is my biggest worry and fear.

One infection and 500K in medical bills even with medicare you are left with 100k in medical bills! Hopefully you have a secondary medical insurance. You still have items not covered medical necessities considered over the counter, and years of follow up monthly visits.

Add in a natural disaster and you are up a creek. I advise on planning on a retirement plan 3 times what you think you need.

I am now working out of my home as a primary care giver I cannot work out of the house, even a trip to the grocery store has to be planned accordingly.

As I stated I am now learning to work on line. Click on Retired Enter Google code #1mom and save 25% this Mother’s Day!

I think it’s prudent to assume just your own money – among other things, divorces happen. My mom’s second husband came into the marriage close to retirement age and with 0 assets (though he does get a pension – men my age generally aren’t in pension-earning jobs).

I’m not worried about Social Security disappearing – I’m worried about not being able to afford a decent nursing home int he last year or two of my life. I have seen the difference between the Medicaid-only nursing home my own grandmother was in, and the very nice multi-thousands-per-month (per person – for a short while both spouses were in the same facility) assisted living/hospice/memory care multi-need facility my partner’s grandparents ended up in. It’s huge.

A person can have a debilitating stroke in their mid-50s and end up in one of those hellholes for 10, 15 years – or, almost as bad, be dying of heart failure or fluid in the youngs and spend just a few weeks in terror and pain because of insufficient nursing care.

It’s not the day-to-day part I’m saving for, I’m resourceful – it’s the end, when we all end up weak, dependent, and needy.

I think it is safe to say that many people are now living in retirement on less money than most financial advisers will tell YOU that you need.

There are so many variables — will you in fact inherit any money or other valuables? Will the new health care reforms help with health care costs? Will inflation be low or high (and what will the rate of inflation be on what you spend money on — not what is the general rate of inflation…).

I think that retirement planning sometimes suffers from the same kind of thinking that we engage in as college students — planning a career that will be brilliant and a lifestyle that will be plush, only to find years later that we have been happy with a career that is not so brilliant, and a lifestyle that is not so plush. Similarly, the idea that “of course” you will want to be a world traveller who stays in great hotels during retirement may in fact turn out to be that you’re the happy grandmother who travels locally to see the grandkids and stays in the guest room.

It’s prudent and enjoyable to have a little more than “enough” in retirement, but I’m just not sure one needs to have as much as the financial advisers will tell you.

My way of looking at retirement planning is probably backwards of all the “experts,” but I think (hope? pray?) it works for me.

Some like to look at percentages, such as “what percentage of my last year’s working income can I replace?” I try to keep up with what I would receive from Social Security were I to retire now(that amount goes up every month that I delay taking SS; I will be 65 in November, so I’m more than a year and a half away from full retirement age at 66), plus investment income.

If I took early, reduced SS now, plus what I am making from fixed-income, annual-increase investments (my self-designed “pension”) I could replace 75% of my present income immediately.

By all “expert” accounts, that means I should find a big cardboard box and a nice underpass to set it up because that’s where I’ll be living. But is that right?

In retirement, my income is not subject to certain deductions and expenses I have now. For instance, I am putting 25% into my 401(k). In retirement, no more of that; in fact, I’ll be taking the money out. My mortgage, recently paid off, equaled 24% of my gross income. (Principal and interest only; I’m still paying taxes and insurance, of course.)

Right there, I am using 49% of my gross income and living on 51% before all taxes and other deductable expenses. If I quit working altogether, I save the SS/Medicare taxes, also; part-time work means paying those, but the income goes up, too.

Yes, I expect health insurance costs to be higher than they are now because my employer picks up the lion’s share of my premium, but I still expect to come out ahead.

I am not counting income taxes because that’s a real crap shoot. We can’t know for sure where that will go, so I’m not figuring the future based on today’s figures.

Overall, that 75% looks less like a cardboard box and more like a raise in my take-home pay.

I really would welcome some feedback, especially from anyone who sees flaws in this. I am seriously looking for the holes in my thinking and planning before it’s too late.

Bill

1. Know how much you currently *spend* (e.g. 75K) – use a tool like Quicken to know for sure (search “hubpages bruce benson” for how I do it).
2. Divide what you spend by 5% (75K/5% = 1.5 million) – this is a good number for your financial freedom. It should maintain your current standard of living for your lifetime Want a fancier tool? Try ESPlanner.
3. Get out of debt, including your mortgage. Save up to buy whatever you need.
4. Read “Stop Acting Rich and Start Living Like a Real Millionaire” by Thomas Stanley.
5. Build up your nest egg in a Vanguard/Fidelity index fund (e.g., S&P 500)
6. Once you hit your number, a salaried job is probably no longer needed. Go do something you are passionate about.

Worked for me.

Thanks for the article and links! It’s about time I spent some time planning for the future in a little more detail than I have thus far.

I think it’s actually illustrating optimism.

If I were about to retire, and I’ve worked the numbers and decided the amount that I have now (500K) is good enough, then that’s what I’ll put down on the survey.

However, as a young person, I don’t expect to have a lot of problems saving. This optimism steers me towards thinking I’m going to have 2Mi saved (inflation adjusted today dollars) to retire when I’m 65.

This just seems to fit better with my idea of young (naive) vs old (realistic). In general most people are optimistic, by a large margin. The older folks are optimistic that their ss, and pensions will support their retirement savings enough to be happy (and they might be right). The young are optimistic and think they are going to save a lot, and not have a serious financial issue in the future (like a substantial unemployment/underemployment period, or a seriously sickness to themselves or their children).

For the record, I’m in the young, naive, optimistic category, and I’m thinking I’ll save as much as possible, then give it all away and live on a canoe.

I’m not sure it’s safe to say that younger people in general are represented by the survey either, since young people who are interested in personal finance are a completely different subset than people who are actually close to retirement and interested in retirement. I’m guessing the younger people interested in finance might be more the type to want to have lots of $ for retirement.

My calcs have led me to believe $2 000 000 would not be nearly enough.

Yep, Sarah makes a great point.

I’m in my mid-late 20′s and think my husband and I will need 2 million plus my husband’s pension when we retire in 25 years. We currently have a 401k, Roth IRA, pension plan, and Scottrade account and a net worth around $130,000 even though my husband is a teacher on a 3 year salary freeze and I’m an office worker going on to 2 years with no raise…

The few friends I have that are our age aren’t even thinking about retirement yet and have saved nothing…in fact, they are racking up debt despite my oh-so-subtle advice (heavy sarcasm).

JD wrote: Since Kris and I keep our money separate, should I be calculating retirement based on just my money?

JD,

I would say no in your case because you are both working and technically your expenses are using both your incomes. Also you’re together now, you plan on being together in the future. If something happens to change that plan, then yes, change your assumptions. If you were curious, you could run both scenarios just to see how you would fair alone. Just keep in mind, you’re combined current living expenses and taxes have to be adjusted for paying all of it on alone, and while there may be some benefits, there are more downsides.

@47 JD:

We do this in hardcore economics too. It fits nicely into the models (like the life cycle model, which we all know doesn’t really fit, but does kind of approximate depending on what you’re trying to do) and is based on average spending. We can easily measure income, but only a couple of big datasets have any spending information (and they don’t have all the other variables we would like), so it is much easier to talk about income than about spending.

I went to a neat talk a couple years ago where someone presented a different heuristic, saying that spending could go waaay down without loss of quality of life (suggesting people aren’t underspending as much as thought). It was memorable because the discussant, Bridgette Madrian at UChicago, took her own spending and estimated what she wouldn’t have to be spending on once she hit retirement, and hit pretty close to what the author of the paper suggested. (Of course, for most Americans, health expenditures will be going way up, even with medicare, so we need to be careful not to forget that expense.)

Obviously there are going to be big differences across demographic groups. Poor folks don’t need as much saving to maintain their current quality of life because Social security replaces a larger portion of their income. An additional dollar income is worth less to wealthy folks, so their incomes can be cut more in terms of dollar value with less loss of quality of life.

There’s a lot of active research trying to get at how much people really do spend and how spending changes at retirement– one of my colleagues is looking at food expenditures and the shift between eating in and eating out. It really isn’t a completely answered question yet, so we’re sticking with the 70-80 percent heuristics in general for policy questions until there’s a better answer. A small group of prominent maverick economists are convinced that Americans are not under-saving for retirement and they’re totally rational. (I disagree.)

And yes, some people spend more in retirement than they did while working, some people spend much less. There’s a lot of heterogeneity.