Our friends at the Employee Benefit Research Institute recently released the latest results of their annual Retirement Confidence Survey, and they've got good news and bad news.
The good news: Americans have plenty of confidence. Specifically, some two-thirds of us (68%) are confident that we'll have enough money to support a comfortable retirement. In fact, our confidence in this matter is on the rise, up from 65% in 2005.
Now the bad news: The same percentage, 68%, report that they and their spouse have less than $50,000 saved for retirement. Among those ages 25 to 35, it's 88%. Yikes. More than half of all workers have saved less than $25,000.
As one article recapping the report accurately noted, many American workers' chief asset is hope -- not something you can take to the bank.
The survey contains other depressing numbers:
- "14% of current workers said they thought they would need less than 50% of their pre-retirement income to live comfortably in retirement, and another 36% expected to need 50% to 70%. However, 62% of current retirees say their income is 70% or more of their pre-retirement income." (Want a tip? Consider planning to need 80% or 85% of your current income in retirement -- health-care costs alone may make this necessary.)
- 59% of workers hope to enjoy their current standard of living (or a better one) in retirement. "But when current workers were asked if they or their spouse have calculated how much money they will need to retire comfortably, nearly six in 10 (58%) said no. And of those who did do a retirement calculation, 8% said they arrived at an answer by guessing."
In an Associated Press article, study co-author Jack VanDerhei commented, ".some people are absolutely clueless . and frozen into inactivity as a result. . They really should find a fee-based professional to help them out. It's going to cost a couple of hundred dollars, but you'll make that amount up many times in the future." (Learn how to find a good advisor at our Advisor Center -- and consider trying a free trial of our own Money Advisor service.)
How bad is it?
Let's engage in a little number-crunching. Imagine that you're a typical American 40-year-old worker who has saved $25,000 for retirement, and who has 25 to 30 years until you retire. How will that money grow for you? Let's assume your retirement investments earn the market's average long-term annual return of 10% (and remember -- you may end up earning 8% or 12% -- the stock market's future is always at least somewhat uncertain):
- 2006 (age 40): $25,000
- 2016 (age 50): $64,840
- 2026 (age 60): $168,188
- 2036 (age 70): $436,235
Now let's use some information I've gleaned from our Rule Your Retirement newsletter -- that in order to make your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement. (You might get by withdrawing 5%, but that's more iffy.) So 4% of $436,235 is almost $17,500. That's about $1,450 per month. Will that be enough? Probably not -- and that's not even considering inflation. According to an inflation calculator I checked, what cost $1 30 years ago now costs about $3.75. Let's say that prices only triple over the next 30 years. If so, your $17,500 in 2036 will buy you what $5,800 will buy you today. That's less than $500 per month.
If you want to live off the current equivalent of $60,000 per year in 30 years, you might estimate that you'll have to be able to withdraw $180,000 yearly. If that's 4% of your nest egg, it will need to be . $4.5 million!
Take a deep breath!
It's not all necessarily as grim as it may seem. You can improve your situation by investing regularly this year and every year. If you feel like you're behind the eight-ball, aim to save and invest 15% or more of your income. Remember that money you save and invest today is worth much more than money you save and invest in five or 10 years. It will have much more time to grow.
If you own a home, that may help you out in retirement, since you'll be able to tap its equity. You'll also likely receive at least something from Social Security, and perhaps even a little from a pension.
Finally, know that while simple broad-market index mutual funds are the best way for many, if not most, people to invest for the long term, you might be able to juice your portfolio's return with a portion of your money parked in carefully selected individual stocks. As a perhaps-extreme example, consider that shareholders in Intel (NASDAQ:INTC) over the past 20 years have seen their investment increase more than 50-fold (which translates to an average annual gain of 22%), while Wal-Mart (NYSE:WMT) shares surged more than 27-fold in the past 25 years (a 14% average annual return). General Electric (NYSE:GE) shareholders have enjoyed a 70-fold increase over about 34 years (for an average annual gain of 13%), a 17-fold increase over the past 20 years (15%), and a 400%-plus increase over the past decade (13%). Even Coca-Cola (NYSE:KO), which has been sleepy for the past few years, advanced at an average annual clip of 14% over the past 20 years. You don't need to find the next Microsoft to get richer.
There's hope!
If you'd like some help with retirement planning, my own favorite retirement information resource is our Rule Your Retirement newsletter, edited by Robert Brokamp. Try it for free for a whole month and sample the great information it offers.
Here's to your comfortable and peaceful financial future!
Selena Maranjian's owns shares of Coca-Cola and Wal-Mart. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. Wal-Mart, Intel, and Coca-Cola are Motley Fool Inside Value picks. The Motley Fool isFools writing for Fools.
