I'm sorry to have to break it to you, but here's some bad news: Your retirement is probably not going to be as peachy as you think it will be. Sure, your evil boss, Mr. Snodgrass, won't be breathing down your neck, and you'll be able to sleep late most mornings. But once you wake up, you may be foraging in your back yard for some edible weeds. And while you're doing that, you may be cursing Bobby McFerrin for ever suggesting that worrying wasn't warranted.
The bad news is that, according to study after study, most of us are nowhere near the savings we need to retire.
You've got your savings
You may feel comfy knowing that you're only 45 and you've already got $150,000 stashed away for retirement. That's pretty good, indeed, but let's run some numbers.
Let's say that you hope to retire in 20 years and that you're fortunate enough to earn the market's historical average annual return of approximately 10% during that period. Your $150,000 will grow to about . $1 million! Sounds great, no? Well, consider this.
Studies have shown that in order to make your nest egg last in retirement, you should only withdraw 4% of it per year. What's 4% of $1 million? $40,000 -- or some $3,333 per month. Will that be enough?
Well, there are lots of considerations. The biggest is probably the cost of health care. It's been skyrocketing in recent years, with no end in sight. Then there's our old friend, inflation. That dollar that gets you a double cheeseburger from the value menu today might just get you a pickle slice in 2026.
You've got a pension
Fortunately, you have a pension, right? No? Well, don't feel bad. Most of us won't, either, going forward.
I do hope, however, that you've at least got a 401(k) plan or something like it at work -- and that you're not among the third or so of workers who aren't making contributions.
Oh, but there's always Social Security
Too many of us are counting on Social Security to provide much of our needed income in retirement. Think again. I've been working since the middle of the Reagan administration, and my annual statement from the Social Security Administration detailing what I can expect to earn in retirement is somewhat encouraging. But remember -- there are still probably at least 20 years before I retire. Will Social Security still be around then? Maybe, maybe not. Will I receive then what I expect today? Maybe, maybe not. Counting on a specific dollar figure is a risky proposition. I think it might be best to save and invest as much as you can, expecting little or nothing from Social Security. Then whatever you do get is gravy.
Are you freaking out yet?
If you're starting to hyperventilate, take three more breaths in that paper bag and then pull your head out. No matter whether you have $150,000 socked away, or $50,000, or just $500, there's hope. You can definitely take steps now to enhance your quality of life down the road.
Here are some actions to consider:
- Fire up that 401(k) if you haven't done so already. Take full advantage of any matching funds your company will chip in. That's free money.
- Save and invest more. If you manage to sock away $5,000 this year and it grows at 10% annually, on average, it will become $54,000 in 25 years. If you get a raise, then save more. You'll earn more in the end.
- Have a realistic perspective. While some well-chosen individual stocks will serve you very, very well -- Home Depot
(NYSE:HD), for example, gained about 25% per year over the past 20 years, and eBay (NASDAQ:EBAY)turned that $10,000 into nearly $150,000 in just eight years -- others will let you down. Lucent Technologies (NYSE:LU), for example, has lost some two-thirds of its value over the past decade. Even amazing Dell (NASDAQ:DELL)is down some 40% over the last seven years. So, be sure to diversify, or hold hundreds or even thousands of stocks in a single broad-market index fund such as Vanguard 500 (FUND:VFINX)or Vanguard Total Stock Market (FUND:VTSMX).
- Consider postponing retirement a little. Here's a tidbit from a 2004 Congressional Budget Office report on the retirement prospects of Baby Boomers: "For households facing shortfalls in their retirement savings, relatively small changes in behavior can have surprisingly large effects. Because people who retire at 62 can expect to live another 20 years, each year they postpone retirement reduces their need for retirement savings by about 5%. An extra year of work also increases their Social Security benefits by several percent."
Your retirement doesn't have to stink
There are more ways to maximize the money you're socking away for your golden years. If you'd like to learn about them, consider trying Robert Brokamp's Rule Your Retirement service -- for free -- for a whole month. Doing so will permit you to peek at all the past issues, which feature, among other things, a host of "Success Stories," profiling people who retired early and are willing to share their strategies. Click here to learn more.
And here's to a happy retirement in your future!
Home Depot and Dell are Inside Value recommendations. Dell and eBay are Stock Advisor picks.
Longtime Fool contributor Selena Maranjian owns shares of Home Depot, eBay, Dell, Pfizer, and Vanguard 500. For more about Selena, view her bio and her profile. The Motley Fool is Fools writing for Fools .