Are You REALLY Saving Enough Money to Retire?

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in Retirement

If you’re an average, middle class individual or couple, chances are you aren’t saving nearly enough to provide a comfortable retirement for yourself. If you doubt it, play around with a retirement calculator.

I did some experimenting with Kiplinger’s Retirement Savings Calculator, plugging in some scenarios to see what turns up. I have to report that what you get when you use realistic assumptions is nothing at all like the rosy projections we see so often from the investment and retirement industry.

Here’s something I noticed: when you assume a double digit rate of return on your investments—10% or higher like the investment companies like to do—all things are possible. But use a more realistic number and things start to look a lot different.

I used truly middle class financial numbers for this exercise, not the high-end versions you’ll see profiled in Money Magazine and elsewhere. My fictitious couple are both 35 years old, earn a combined $75,000 per year, have $50,000 already stashed for retirement and plan to retire at 65, giving them 30 years to prepare.

The tool allows you to input information on your home, but I’ve decided to omit this since the sale of your home would require the purchase of another. Also, since the “Percentage of current income you want to replace” is recommended at 80%, at least one major expense will need to disappear from the couple’s budget, so we’ll assume they’ll stay in their home and pay off the mortgage.

WARNING: the numbers that come on the back end of this exercise are not pretty!

The Input:

Gross income – you: $50,000
Gross income – spouse: $25,000

Years until you begin retirement: 30 (assume age 35 at the start)

Percentage of current income you want to replace: 80% (the recommended percentage)

Monthly Social Security income – you: $1000 (who knows where this will be in 30 years, so we’ll be conservative)
Monthly Social Security income – spouse: $500 (ditto)

Monthly retirement pension income: 0 (assuming no pension since most workers are no longer covered by defined benefit plans)
Will your pension include annual cost of living adjustments: NO

Current value of 401(k)’s, IRA’s and other retirement accounts: $50,000

Estimated average return on investments between now and retirement: 6% (we’re assuming a mix of stocks and fixed income investments)

Current market value of your home: N/A
Remaining mortgage at retirement: N/A
Cash you expect to use from home sale to buy a new house: N/A

Years you expect to live in retirement (Assume you will live until at least 90): 25 (retire at 65, live to 90, as recommended by the tool)

How much of your portfolio will be invested in stocks during your retirement? 50%

Any additional assets expected at retirement: 0 (This is a middle income couple, so let’s be conservative and figure that life and college costs for their children will eat up any excess savings)

The application assumes a 3% annual inflation rate and 2% annual home appreciation, which we’re ignoring since this couple won’t be selling their home for investment purposes.

The Results:

You can put different numbers into the application and come up with very different output, but here’s what came out of our middle class couple using conservative assumptions:

Annual Retirement Income In Future Dollars: $145,800.00
Annual Soc. Sec. and Pension Benefits: $43,740.00
Nest-Egg Goal: $2,633,148.00
Projected Future Value of Current Savings: $287,000.00
How Much You Should Be Saving Each Month: $1,689.00
(This amount includes how much you are already
saving plus any employer match)

This couple will need to accumulate $2,633,148 over the next 30 years—and to do it on an annual income of $75,000. In order to do it, they’ll need to set aside $1,689 per month, or $20,268 per year. That’s well above 25% of their income! Do you think they can do it?

Now, here’s something interesting though perhaps not surprising; when you increase
“estimated average return on investments between now and retirement” from 6% to 8%, the monthly contribution required to reach the desired $2.6+ million nest egg drops to a more comfortable $1,108 per month, or $13,296.

Raise the expected rate of return to 10%, and the monthly contribution drops to very doable $634 per month, or $7,608 per year. That works out to be about 10% of our fictitious middle class couple’s annual income. Wow, that was easy; just change the assumption on one number, and the entire projection looks a whole lot better! But as tempting and attractive as this may be, is it achievable?

My own thought is that while assuming a 10% rate of return would certainly get you to your retirement goal, it may not be realistic. The stock market hasn’t provided such returns in the past ten years, and it seems that double digit performance might be more of a bonus than a reliable expectation. Should the return be that high, it’s entirely possible that offsetting factors—such as a higher inflation rate—might also be present, largely nullifying the higher return.

If you think that I’m being overly conservative with these numbers, it’s worth considering that we haven’t factored in predictable elements like non-housing debt or periods of extended unemployment. Then there are imponderables, like the future cost of healthcare…

Do you think that a 10% rate of return on investments over the next few decades is something we can rely on? If not, what would you recommend doing to meet the goal? What are you doing to prepare for your own retirement? Are you relying solely on accumulating and growing your retirement nest egg, or are you also looking in other directions?

(photo credit: Shutterstock)

Kevin At Out of Your RutThis post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.

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73 is the new 65: Are you saving enough for retirement? « Portfolioist.com
2010/12/20 at 8:02 am

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cm 2010/09/26 at 2:01 pm

If the couple brings home $75k gross, that means the actual after-taxes take-home is more like 75k * .75 = $56,000. Saving $20,268/year is 36% savings. Whether that is possible will depend so much on what town they live in, whether they have children, and whether they don’t have any unfortunate circumstances like uncovered illness.

But yes, they could get by on $35,732/year. That’s almost $3k/month, and if they rent and are frugal, sure. They could get by less, in fact.

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Kevin 2010/09/28 at 11:29 am

cm – It would be possible to save and accumulate money at the higher end, but I think it’s also true that most people don’t save at anything close to that rate. Also, the assumptions of where they live or whether or not they have children might preclude a lot of people from doing it. It would almost take a perfect world to make it work.

The point of the post though is not to rely on overly rosy retirement plan projections. It will take a lot more money and discipline than most people will be willing to commit to reach a full worry free retirement. Most people would do well to develop a Plan B. A Plan C wouldn’t be a bad idea either!

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Sam Denis 2010/10/21 at 11:13 am

Meeting one’s goal is important, but let’s not forget about what type of retirement one can have. Also, if one doesn’t meet the goal, there may be other alternatives. One of those would be living in a smaller home or moving to a different country for retirement. I would argue people with a few hundred thousand dollars can live very well in some developed countries and a few million dollars would not be adequate for some people in superpower countries.

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Kevin 2010/10/22 at 7:09 am

Sam – Totally agree. The point of the post is to sound the alarm that it’s unlikely most people will have a seven figure nest egg at retirement, due to the fact that projected rates of return on investment are exaggerated.

The smaller home (and it’s attendant lower costs) or even a move to a less expensive region or country might be good suggestions for people who won’t have elite retirement plans.

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Jane 2010/11/16 at 2:00 pm

I used the same calculator, and I do agree that often people use a very optimistic rate of return – they go by 10% or more. I would prefer to err on the side of caution and put the returns at 6%-8%. This was the # that I had used – and when I crunched the #’s I looked at 2 potential numbers for income $80K / year for a couple versus $90K / year for a couple. The amount I got was a staggering $4M+ that was needed. The caveat also was that I chose not to put in social security even though we’d be entitled to a meager amount, because I don’t feel confident at all with how the current social security situation (more like a crisis) is going.

There are ways that you can protect your assets against risks that would easily deplete your savings: since you’re a Ramsey fan, you probably have term life insurance. That would protect against death as well as catastrophic illnesses that put many people into trouble. I’ve found that it’s often NOT just about the size of your nest egg that matters, but the strength of your wealth / asset protection that makes a difference in the security of your retirement.

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kevin 2010/11/16 at 5:39 pm

Jane – Good points. I think it also has a lot to do with your lifestyle too. The less you can live on, the less you’ll need. That’s the side of retirement planning so many people overlook, and after a while it all become a money chase until you aren’t sure what it is you’re chasing anymore.

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