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Does gruesome retirement lie ahead?

It’s Your Money

Posted: August 20, 2008 8:20 p.m.
Updated: October 22, 2008 5:02 a.m.
I have been preparing a lot of retirement plans lately for clients. It seems that those who have been coming in for this service are the ones who have adequately prepared financially for their retirement years.

I have a feeling that I am missing those who really need this service. I feel that, in a sense, I am preaching to the choir. Those that need retirement planning the most seem to be the least likely to seek guidance and help.

According to the 2006 Retirement Confidence Survey, we can be confident that many people will have gruesome retirements. In fact, according to a separate survey, 31 percent of Americans would rather scrub a bathroom floor than plan for retirement. I think those are the ones that I was referring to when I stated that they are the least likely to seek retirement planning help.

Check out the numbers, from the RCS, in the graphic. They reflect the total savings and investments (not including the value of the primary residence) of today’s workers, broken down by age group.

These statistics don’t include Social Security payouts. Given the threat that Social Security may be bankrupt within the next 20 years or so, it may be just as well that Social Security was not included.

Lets not forget our pensions. In truth, very few of us have traditional pensions anymore. An Associated Press article highlighted the issue: “In 1985, 89 percent of Fortune 100 companies offered traditional pension plans, but that had fallen to 51 percent by 2004, according to Watson Wyatt Worldwide, a human resources consulting firm. Some 11 percent of the plans in the Fortune 1000 were frozen or terminated for new employees, up from 5 percent in 2001.” The bottom line here is that fewer of us can count on any traditional pension payment relief to aid us in retirement.

Let’s say you’re a typical 40 year old working American. According to the table above, there’s about a 50 percent chance that your savings and investments total less than $25,000. Let’s be generous and assume that you have $20,000 socked away, and that you also have about 25 to 30 years until you retire. How will that money grow for you? Well, here’s what happens when we assume that you earn the market’s average long-term return of 10 percent:
n 2007 (age 40): $20,000
n 2017 (age 50): $51,875
n 2027 (age 60): $135,550
n 2037 (age 70): $349,000

To make the nest egg last, you should plan conservatively and withdraw about 4 percent of it per year in retirement. So, 4 percent of $349,000 is almost $14,000. That’s about $1,200 a month. Will that be enough to live on in 2037?

An inflation calculator I use shows that a buck 30 years ago would equal $3.75 in today’s purchasing power. Assuming the same rate going forward, your $14,000 in 2037 will buy you what you can get for $4,700 today. That $1,200 a month will feel more like $400. OUCH.

This means that we should strive to add to our retirement investments on a regular basis. A rule of thumb is to save and invest at least 10 percent of your income (more, much more would be better).

Also most of us will have home equity to tap, if need be, in retirement.

We’ll also receive something from Social Security, and, perhaps, even a little from a pension.

The stats above are scary. Don’t find yourself having to eat hot dogs and beans in retirement because you can’t afford anything more.

Here’s to avoiding a gruesome retirement — and securing a great one!

D. Frank Norton CPA, MBA, CFP, is a money manager and financial planner in Santa Clarita. His column represents his own views, and not necessarily those of The Signal. “It’s Your Money” appears Thursdays and rotates between a handful of the Santa Clarita Valley’s financial professionals.


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