No One Cares More About Your Retirement Than YOU Do

In recognition of National Save for Retirement Week, let's take a gander at some numbers:

    • The average Social Security retirement benefit is $1,159 a month, or $13,908 a year.

 

Put those together, and you come to two conclusions:

    1. If you aren't covered by a traditional pension and choose not to save for retirement, you're left with just Social Security and an annual retirement income that is not far from the poverty line ($10,830 for a single American in 2009). Not fun.

 

  1. If you're one of the lucky few (and getting fewer) who will receive a monthly check for life from a defined-benefit plan, those checks combined with your Social Security would amount to an annual retirement income of bit over $30,000, assuming the averages. That's not a bad income, especially since many expenses really do drop in retirement (though some retirees go nuts with the cruises and RVs). But here comes the bad news: Most pensions don't adjust for inflation. So an $18,000 benefit today would be able to purchase just $13,274 worth of goods in a decade, assuming a 3% annual inflation rate.

Oh, and there's another little issue. Social Security and many (if not most) pensions may not have enough money to pay off projected benefits.

The bottom line is this: If you want an above-the-poverty-line retirement, and you want to feel comfortable that it will stay that way for the length of your retirement, then you must save, save, save, and then save some more.

It's obvious, I know. At least, I think it is. But clearly not everyone is getting the message.

The EBRI reports that “among all families with a defined-contribution plan [such as a 401(k)] in 2007, the median (mid-point) plan balance was $31,800…Among all families with an IRA/Keogh plan, the median value of their plan was $34,000 in 2007…” Keep in mind that those are figures as of 2007, before the stock-market crash last year. So if we assumed that someone had both an average-sized 401(k) and average-sized IRA, then they'd have savings of $65,800 or less. That would be a nice chunk of change to find in the sofa cushions — but it wouldn't last long as a primary source of living expenses.

How much do you need to save?
In a previous post, I described how you could use an online financial calculator to estimate when you can retire given your current savings rate, how much you need to save now to retire when you want, and the impact of various scenarios (e.g., working part-time in the first few years of retirement, downsizing to lower-cost living arrangements, etc.). As I wrote then, these calculators aren't crystal balls; the future is just too unknowable. But they will provide a very enlightening estimate of whether you're on track, and what changes will have the biggest effects on your retirement success.

Furthermore, they show the long-term benefits of saving. Go ahead, run your numbers, and then do it again, but this time assume you'll save, say, an additional $200 a month. Chances are, you'll be impressed, especially if you're on the young-ish side.

Or for a different take, fill out a retirement calculator and assume you don't save another dime. Then see what kind of retirement you have in store. For most people, it won't be pretty…and that might provide a necessary kick in the pants.

I've confessed before that, despite being the retirement-planning guy at The Motley Fool, I don't plan to fully retire. Yet I continue to max out my 401(k), year after year. I know there may come a time that I may no longer be able to work, and it's also likely that I'll join that Great Tax Shelter in the Sky before my wife. I save now because I want my future enfeebled self and widowed wife to be taken care of.

So do a big favor for your future self and (if you're the marrying type) your future spouse: Save, save, save, and then save some more.

A stiff upper lip
Finally, on an unrelated note: If you'd like to spend money right now rather than save it, but you'd prefer it goes to a good cause, and you'd like the added bonus of seeing some really horrible collections of facial hair, support this year's Mustaches vs. Cancer campaign.

Along with five other Motley Fools, I am participating in this two-month mustache-a-thon (much to the chagrin of our female friends). You can sponsor my ‘stache at my profile page. Yes, I know it looks like a balding caterpillar died on my lip. But it's only been a couple of weeks, and it raises money to help kids with cancer. So give a hoot, support my snoot!

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Steven
Steven
11 years ago

In this situation, an average will not give you useful information because you don’t know the distribution of data. Not knowing what the data looks like, I assume that it is skewed toward very low amounts and very high amounts, giving a bi-modal distribution. If that’s true, the average is pretty much irrelevant. Also, is the average even enough? Just because you are above average, does not mean you have enough. Like you said in the post, the numbers are before the market crash, so the average are lower now. I’m glad you didn’t make average the goal, and said… Read more »

Alexandra
Alexandra
11 years ago

On the other side of the coin…my husband and I just had a conversation last week, and I concluded that we are saving TOO much for retirement. Right now I spend 25% of my annual after-tax salary on childcare and child education, 22% on my mortgage and 29% goes to savings. All three of those expenses will be gone when I reach retirement. Most of the calculators suggest that I save about 80% of my annual salary for retirement, but I am spending only a quarter of it right now. When I retire, it’s going to feel like I’ve hit… Read more »

Little House
Little House
11 years ago

I’ll have to check out the calculator, but they usually scare me! One primary reason I haven’t started my contributions towards retirement.

I really need a kick in the bu….

thanks again-
Little House

Paul in cAshburn
Paul in cAshburn
11 years ago

Hmmm… average retirement savings are low, pensions are less common and will be negatively affected by inflation, and people need to save more. Gee, that was an informative post. And he’s a professional?
(Sorry for the negativity, but I just didn’t see the usefulness unless this is the first article you’ve ever read on retirement.)

Steven
Steven
11 years ago

@2 Alexandra

You’re right, those expenses will be gone, and assuming a full retirement, so will that salary.

The reason to save so much is to make sure you don’t have to worry about money during retirement. You don’t want to cut it so close that you’re constantly worrying about money.

But I do agree with living a little. Depending on how much you have in savings, what you expect to spend in retirement, and your age, saving almost a third of your after-tax salary is quite an accomplishment. Just beware of lifestyle inflation.

Foxie || CarsxGirl
Foxie || CarsxGirl
11 years ago

Calculators only make me depressed right now, considering that I can’t save nearly enough as they suggest I do. Instead, I’m doing what I can now and hoping that it’ll make a positive impact. Perhaps, someday, I can dream of maxing out a 401(k), but it won’t be done while I’m in school, or maybe even with student loans. If my husband follows his current plan, he’ll end up retiring from the military with some nice benefits, which takes a lot of worry out of life. (Only 14 years to go!) I certainly plan on working, as long as I… Read more »

Shane
Shane
11 years ago

I just jumped on the retirement saving train in January. I have about $2800 in my 401k. I’m going to open up a Roth IRA next year and contribute about $100 a month to start. Paying down my student loans is a big focus of mine right now, because they make a pretty hefty bill every month.

I hope I have enough for retirement… I’m 22.

Nate
Nate
11 years ago

Shane @7, Don’t worry so much! You have such a great start with $2800 in your 401(k) already. Although I have to mention that I hope you are putting that money in good growth stock mutual funds/EFTs etc. as apposed to some of my younger friends who are stuffing their retirement savings exclusively in CDs and bonds (now that is dangerous considering inflation). I’m 24 and have been chewing away at the student loans for about 2 year now — I can tell you that it gets so much easier over time (because your income grows, the balance declines, and… Read more »

Rob Bennett
Rob Bennett
11 years ago

I am not impressed with advice to “save, save, save and then save some more.” There is universal agreement that saving is a good idea. And the saving rate until recent times was a negative number. We need to be looking deep at what is wrong with the saving advice of today. Why does it not work? Telling people to “save, save, save and then save some more” just adds to the guilt trip. That’s what we have been doing for decades now. That is what doesn’t work. We need to look deeply into what saving does for people and… Read more »

Sheila
Sheila
11 years ago

One thing I’d never heard until I went to see a financial planner at my C.U. was that we should take out a term life insurance policy on my husband that will cover the amount of money that I would lose from my husband’s defined benefit plan should he die before me. I’d never thought about the fact that the pension income (although it’s not that much) would be reduced by half. The fixed expenses would stay the same, however, so I’d need that additional money.

Amy
Amy
11 years ago

You say ” Yet I continue to max out my 401(k), year after year. I know there may come a time that I may no longer be able to work, and it’s also likely that I’ll join that Great Tax Shelter in the Sky before my wife. I save now because I want my future enfeebled self and widowed wife to be taken care of.” I think the pschycology behind this statement is worth a whole article in itself. From my personal experience and what I’ve seen: People don’t want to admit that ‘one day I may be feeble, not… Read more »

Lesley
Lesley
11 years ago

@Amy (#11)

Same as the reasons why people don’t insure themselves appropriately or write wills…

Des
Des
11 years ago

While it was well written, I have to side with Paul that unless this is the very first article you’ve ever read on retirement, this is just a regurgitation of the same thing you hear everywhere: SS & pensions might be gone, inflation will get you, save more.

Steve Juetten, CFP®
Steve Juetten, CFP®
11 years ago

I am appalled and disappointed at the publication of this article. The first link that the author uses is to a commercial site — a mutual fund company. His advice — save, save, save — is about as useful as telling someone they should stop smoking because it’s bad for their health. All people hear when you tell them to save is “blah, blah, blah.” The author uses generalities, averages and scare tactics to some end that I can’t see. Finally, the author finishes with a plea for contributions to a personal charity. Please don’t use the bully pulpit of… Read more »

Allie
Allie
11 years ago

Hey everyone. I need a little advice. My husband and I are young (30 and 32) and do not have any debt (own cars and house). We save the greater of our incomes each month and each contribute nominal amounts to our respective 401k accounts (only one employer matches $20 – generous I know, but at least we have jobs).

We want to have children (like yesterday), but generally don’t know what to do with our money.

Where do we go from here? Someone offer suggestions please!

Financial Samurai
Financial Samurai
11 years ago

It would be great if Robert you could elaborate on the “How Much I Need To Save” portion. That’s the big question. How much and for how long.

Or, do you think if we just save without a target, and cross our fingers that when the time comes to retire, we’ll have enough. Pls elaborate. Thnx!

elisabeth
elisabeth
11 years ago

I’m with Alexandra — many readers of GRS are already living simplified, less consumption-driven lives, and thus won’t need as much for retirement as many retirement planners think. And while the inflation fear is often trotted out, we may be moving into a period of very low inflation, which will on the one hand make it harder to earn money on one’s savings but on the other hand, reduce one’s costs in retirement.

Steven
Steven
11 years ago

@16 Financial Samurai For the first time, I completely agree with you. @9 Rob Bennett You contradict yourself in your post. First you say the savings rate was negative just until recently, then you say people have been saving for decades. The two are opposites, pick 1. Next, saving is not the problem, it’s the lack of saving due to instant gratification. Everyone wants instant gratification, so they overspend and don’t save. In a way, the recent upswing in frugality, personal finance, and saving could be attributed to instant gratification as well. People don’t want to fear for their future,… Read more »

zud
zud
11 years ago

I’ve done a few of the online retirement planning calculators and they all ask for a projected return on investment and i really don’t know what percentage to put in and how to account for inflation. i want to be realistic but i have limited knowledge on what number to use here. my personal savings will have to carry me thru retirement as i don’t have a traditional plan, nor am i really counting on govt pension to go very far when i retire.

thank you

chacha1
chacha1
11 years ago

@Allie, don’t worry, once you have a kid or two, the question of what to do with your money will resolve itself! Frankly, you sound so in control of things, my recommendation would be to find a way to get time off – a couple of weeks – and take a great vacation, second honeymoon, whatever. Because again, once you have a kid or two, whatever travel you do will be all about them (basing this on observation, not personal experience, I don’t have any kids). Plus the time will be harder to find. Well done to you and your… Read more »

Tyler Karaszewski
Tyler Karaszewski
11 years ago

In summary:
“Social Security isn’t enough to retire on. Save. There are sites online that will suggest amounts.”

We get to talk about something else again next week, right?

Rob Bennett
Rob Bennett
11 years ago

First you say the savings rate was negative just until recently, then you say people have been saving for decades. The two are opposites, pick 1.

You misunderstood, Steven. We’ve been hearing the same saving advice for decades and it has been failing to do the trick for decades. I believe that it is time for consideration of some new ideas. I don’t think guilt trips work.

Rob

Gee
Gee
11 years ago

chacha1 “Because again, once you have a kid or two, whatever travel you do will be all about them (basing this on observation, not personal experience, I don’t have any kids).” Most people LIKE their children and enjoy spending time with them. At least in my experience. Yes, you may not be doing things in the same way, but most are happy to see that change. Every family is different. You don’t have to only visit theme parks if you don’t want to. There are tons of books about travelling with children of all ages. Afterall, most places you go… Read more »

Samantha
Samantha
11 years ago

Gee (#23), I think chacha1 is completely right. I’m not a parent, but I was an only child, and I can tell you that every vacation we took was completely for me. It wasn’t until I was in college that my parents started taking vacations to places THEY liked to do things THEY wanted. Great parents are like that. And Allie, I also agree with chacha1 that if you’re thinking about kids, you should do a big trip now, since you’ve got both available cash and available time. Of course, you should make sure you have quite a bit of… Read more »

E
E
11 years ago

Allie, can I have your problem? 😀 Personally I would max out those retirement accounts now while you can and set up a beefy emergency fund. That way if you have to dial back contributions later, the money will be there growing. A Roth IRA wouldn’t go amiss either, assuming your incomes are low enough, in case taxes go way up in your retirement. You will have the freedom to choose whether to work after having kids – lots of people don’t have a choice. And while you can have fun travelling with your kids, lots of people have a… Read more »

Pirate Jo
Pirate Jo
11 years ago

Alexandra says: “So I told my husband that I don’t want to be saving as much as we are – that I want to spend some of that money now and enjoy life when I am young and healthy.” Lady, you are smart. I’ve heard about those old people on cruise ships – it sounds like they spend a lot of time sleeping. If you want to take a cruise, do it now, while you can enjoy it! Saving money is a good thing, but you should be saving money FOR something. And if you are saving for “retirement,” what… Read more »

Pirate Jo
Pirate Jo
11 years ago

“The reason to save so much is to make sure you don’t have to worry about money during retirement. You don’t want to cut it so close that you’re constantly worrying about money.”

No, worry about money now! Just worry, worry, worry, and then worry some more. Keep it up, and by the time you reach retirement you will be so used to it, that by then it won’t even feel like you are worrying about money.

Foxie | CarsxGirl
Foxie | CarsxGirl
11 years ago

@zud (19) — I’ve done a few of the online retirement planning calculators and they all ask for a projected return on investment and i really don’t know what percentage to put in and how to account for inflation. If you’d like to be on a safer side, a 4% return would likely account for “historic” market returns combined with inflation. (Think 7% for returns and 3% for inflation.) Now, how accurate, I’m not sure. But I know it surely won’t hurt you if you err on the side of caution and aim to deal with lower returns. If someone… Read more »

Bobby
Bobby
11 years ago

Saving right now is crucial for those planning for retirement. Ever since the economy took a turn for the worst I think this point was really driven home. People are more worried than ever about their finances and they need all the spending advice they can get. Many boomers are having to put off retiring because they can’t afford it. This, among other reasons, is why saving is one of the safest ways to ensure a nest egg for the future.

Financial Samurai
Financial Samurai
11 years ago

@18 Steven – Wait, you mean you don’t agree with all that I’ve written in the past? 🙂

Alexandra, you hit it spot on. All your expenses will indeed be gone, so live a little! Just don’t forget to have long term care.

David/Yourfinances101
David/Yourfinances101
11 years ago

I have heard so many different figures bandied about that at this point I am just trying to save as much as I possibly can for retirement. I cannot even imagine working hard my whole life and then not having enough to enjoy retirement.

I’ll worry about accurate figures later, for mow my goal is to save as much as I can

Gale
Gale
11 years ago

@Foxie – The conservative approach is probably the way to go. The average stock market return over 20 or 30 years is around 10% but this number can swing wildly in either direction due to standard deviation. I typically assume a 5% return (8% yield less 3% inflation). I did some research for an article I wrote to better understand how much money a 25 year old needs to live during retirement and the amount of monthly savings needed to hit that goal. Americans spend an average of 20 years in retirement, while comfortably (not extravagantly) living on about $36,000… Read more »

Gale
Gale
11 years ago

One correction to my last post! I was double counting for inflation…this is what I get for thinking after 8pm. 🙂

With an 8% return and 3% inflation (which should be calculated on living expenses not monthly savings), a 25 year old needs to save $925 a month to reach the goal of $3.2MM at age 65. Remember that this isn’t extravagant living so save more if you can.

Mike
Mike
11 years ago

Great post! And I love the pics of the ‘stauche! Have you tried using Rogaine? 🙂

Suzanne
Suzanne
11 years ago

Re: the retirement calculators

I’m pretty sure that most of them account for inflation already. I always choose one that shows you what their assumptions are.

Bloomberg has a nice simple one (might not work if you have complicated finances) that I like at http://www.bloomberg.com/invest/calculators/retire.html

Kevin
Kevin
11 years ago

The fact that I learn about a ‘National Save for Retirement Week’ through this site is very discouraging. Have any of you heard about it elsewhere? Please advise. Meawhile Congress is on a National Speeding Spree and each have been given a raise this year. Very Ironic. It makes me wonder, do they really want American’s to ‘Save’? Or do they prefer to take care of us? And why has the Media been quiet about this….? People who visit sites like this are a minority. Consider yourself well ahead of most by even reading sites like this. Sorry to get… Read more »

Jeff
Jeff
11 years ago

What does everyone think about real estate investments (rental properties) as a hedge against inflation? We have a fairly good income and could afford to purchase and pay off a rental every 5 years or so between now and retirement (i’m 38, assuming retirement is 60-65). I could still invest some in my Roth IRAs and with maybe 5 total rental properties create a inflation-hedged retirement until I’m a bit older, maybe 75-80, and then sale them off. This would create some income in my late 50s through 70s and still protect me from inflation (i.e. home value and rental… Read more »

Paul in cAshburn
Paul in cAshburn
11 years ago

@Jeff #37: Jeff, there are so many ways to lose money in real estate that they have to put out publications saying “make a million in rental real estate with no money down” to get people interested in it. A house for you to live in is one thing, but as an investment? Houses are a DEpreciating asset – especially houses that over 10 years old. When you have tenants, you must keep the property well-maintained (whether or not the rent you collect exceeds your carrying costs) or get sued by the tenant (this is another thing ACORN is good… Read more »

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