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Wretched Retirement Realities

Ah, retirement. A time for travel, hobbies, family, and the "stick sports" (golf, fishing, shuffleboard, and walking along the beach with a metal detector).

Also, $1.25 million. That's how much you'd need if you wanted your savings to provide $50,000 of inflation-adjusted retirement income every year, with a good chance that you wouldn't outlive your money.

We don't mean to tarnish your visions of unfettered free time and leisure activities. In fact, in my Rule Your Retirement newsletter, I regularly profile people who can live off their portfolios -- from people who have retired at age 38 to people who have semi-retired but continue to do work they enjoy part-time. I firmly believe you should keep your dream retirement forefront in your mind -- it'll motivate you to work for that day when you no longer have to work.

But like so much in life, being able to kiss the boss goodbye is a numbers game. Here are some of the numbers to consider as you work for that full-figured retirement.

1. 4% to 6%
Let's start with that $1.25 million mentioned earlier. Most studies indicate that if you want your savings to last, you shouldn't withdraw more than 4% to 6% each year (4% of $1.25 million is $50,000). The exact amount depends on many factors, including how long you plan to live. OK, so you can't "plan" your life expectancy, but someone who retires at age 60 and is in good health should withdraw a smaller percentage of assets than should a veteran of World War I (of which there are fewer than 1,000 still alive, though Alfred Pugh, the last wounded veteran of the war, died just last year).

Your withdrawal rate also depends on your other sources of retirement income (Social Security, pension, part-time work). If your other sources are significant, you can look at your withdrawal rate in two ways: (1) You won't need much from savings, so you just take out a little at a time, leaving the rest for emergencies and/or your heirs; or (2) you have other sources of income to fall back on if you outlive your savings, so you can bump up your withdrawal rate.

If you don't expect a huge chunk of income to come from sources other than your savings, then you need to be more conservative with your withdrawal rate -- and more aggressive with your savings rate, if you're not yet retired.

2. $4,400 to $6,600
Given a withdrawal rate, you can apply it to your own savings to see how much retirement income your current savings could provide. This offers a quick snapshot of where you are -- and how far you might have to go. As an example, let's look at a hypothetical saver, using some real-life stats.

The median balance in a 401(k) is approximately $70,000, depending on whom you ask. The median balance in a traditional IRA is $30,000, and the median balance in a Roth IRA is $10,000.

So, let's assume our hypothetical saver has one of each of these accounts, along with the median balances, resulting in a total retirement savings of $110,000. Applying our 4% to 6% withdrawal rate, we get annual retirement income of $4,400 to $6,600. Not a whole lot, is it?

3. $3,300
So, as a nation, we're not saving enough. There are lots of reasons for this, one of which is our unwillingness to forgo current consumption in order to save for a goal that is years -- even decades -- down the road.

However, not saving has a real cost today, at least when it comes to using retirement accounts. The less that is contributed to a 401(k), 403(b), or similar account, the more taxes are paid, since contributions are essentially tax-deductible. Plus, workers who don't participate miss out on the employer match (if there is one).

Again, let's look at an example. If a worker earns $60,000 a year and contributes $6,000 (10% of salary, a good target) to her 401(k), she'll save $1,500 in federal income taxes, assuming she's in the 25% tax bracket (as most taxpayers are). Plus, if her employer matches 50 cents on every dollar contributed to the plan up to 6% of her salary (the most common matching formula), then her employer will deposit $1,800 a year in her account.

Add it together, and you get $3,300 worth of missed tax savings and free money from the boss -- the price today of not saving for tomorrow.

4. 2019
According to the report released yesterday by the Medicare trustees -- folks such as Treasury Secretary John Snow, Health and Human Services Secretary Tommy Thompson, and an economist with the ironic last name of "Saving" -- Medicare's trust fund is now projected to be depleted in 2019. That's seven years sooner than last year's projection, due in part to increased health-care costs, lower tax receipts, and the new prescription-drug benefit (which we were told would cost $400 billion over 10 years during the debate, but will cost well more than $500 billion now that it is law).

According to the report, Medicare represents 2.6% of U.S. domestic gross product. However, since the growth of Medicare costs will outpace economic growth, the program is projected to represent 3.7% of GDP by 2010 and 7.7% by 2035.

What this means is, health care and retirement are linked at the prosthetic hip -- becoming big-ticket, national issues. Comfortable golden years are no longer based just on savings, Social Security, and a pension. Retirement planning now also necessitates health-care planning.

5. $11,448
We're hearing a lot about Social Security these days. Whatever happens to the program, folks will not -- nor never could -- rely on Social Security to fund the retirement of their dreams. The average monthly benefit for December 2004 was $954. That's just $11,448 a year.

Here are some more stats for you, which are even scarier in light of that average benefit: According to the Social Security Administration, approximately two-thirds of seniors get 50% or more of their income from Social Security and about one-fifth rely solely on Social Security.

The stats that matter
Here are the most important numbers: the balances in your retirement accounts, how much you're contributing to them or withdrawing from them, and how you've invested them. To see if it's enough, do a dance with our retirement calculators for a rough estimate. And consider a 30-day free trial of our Rule Your Retirement newsletter service.

Robert Brokamp is the editor of Rule Your Retirement.


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