Prepare for a Gruesome Retirementhttp://www.fool.com/personal-finance/retirement/2007/01/19/prepare-for-a-gruesome-retirement.aspx Selena Maranjian
January 19, 2007
It's time for some tough love. After all, I want you to have a comfortable retirement, doing things that you enjoy and have always desired. That may mean dining in fine restaurants, traveling to the Galapagos Islands to see blue-footed boobies, or taking your grandchildren to Hershey, Pa., to eat chocolate to their hearts' content -- and then coming home from these activities to your spiffy retirement community.
But judging from some startling statistics I discovered, you're in danger of a retirement that's quite the opposite. Picture dining on Salisbury steak TV dinners, traveling to the Git'n'Go down the street for a bag of chips, taking your grandchildren to the Salvation Army as you shop for some new clothes -- all while living in a relative's damp basement.
Check out the numbers from the RCS survey. 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. Maybe there's a reason for that. I have at least two decades until retirement. In fact, I recently received my latest statement from the Social Security Administration and found out that the amount I can expect to receive at my full retirement age of 67 isn't much more than my current mortgage payment. My 30-year mortgage won't be finished by the time I hit the big 6-7, and my mortgage and tax payments will likely be much higher because of rising taxes. Making matters worse, it's possible that I -- no, we -- can't be entirely sure that Social Security will be around in much the same form in my -- no, our -- golden years.
Then there are pensions to consider. The truth is that darn few of us have traditional pensions anymore. An Associated Press article highlighted the issue: "In 1985, 89% of Fortune 100 companies offered traditional pension plans, but that had fallen to 51% by 2004, according to Watson Wyatt Worldwide, a human resources consulting firm. Some 11% of the plans in the Fortune 1000 were frozen or terminated for new employees, up from 5% in 2001." Companies that have frozen all or part of their traditional pension plans (or are slated to do so) include Citigroup, Verizon (NYSE: VZ ) , IBM (NYSE: IBM ) , and General Motors (NYSE: GM ) .
I think it's better to rely instead on those factors that are under our control: our savings and investments.
What the facts mean
Now, let's use some information I've gleaned from the Fool's newsletter service: In order to make your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement. So 4% of $349,000 is almost $14,000. That's about $1,200 a month. Will that be enough? According to an inflation calculator I used, what cost a buck 30 years ago will cost about $3.75 today. Assuming the same rate going forward, your $14,000 in 2036 will buy you what you can get for $4,700 today. So that $1,200 a month will feel more like $400. Startling, isn't it?
Another way to look at it is to realize that the 4% withdrawal rate should include inflation-indexed increases, so if you're taking out $14,000 in the first year of retirement (and inflation that year is 3%), the next withdrawal will be 1.03 times $14,000, or $14,420. Can you imagine how quickly your money will go? (Note: You can withdraw more each year. If you're taking out 5% annually over 30 years, you have roughly a three-in-four chance of not running out of money, but that's far from a sure thing.)
If you want to live off the current equivalent of $50,000 per year in 30 years, you can estimate that you'll have to withdraw $150,000 annually. If that's 4% of your nest egg, then that nest egg will need to be $3.75 million! Still startled?
It gets better ... and worse