Friday, October 23, 2009

Thursday, October 22, 2009

No One Cares More About Your Retirement Than YOU Do

No One Cares More About Your Retirement Than YOU Do: "

This is a guest post from Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the advisor for The Motley Fool’s Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks.

In recognition of National Save for Retirement Week, let’s take a gander at some numbers:

  • The average Social Security retirement benefit is $1,159 a month, or $13,908 a year.

  • According to the Employee Benefits Research Institute (EBRI), approximately a third of the 60-and-over crowd receives a monthly check from a defined-benefit plan, also known as a traditional pension. The average annual benefit is about $18,000.

Put those together, and you come to two conclusions:

  1. If you aren’t covered by a traditional pension and choose not to save for retirement, you’re left with just Social Security and an annual retirement income that is not far from the poverty line ($10,830 for a single American in 2009). Not fun.

  2. If you’re one of the lucky few (and getting fewer) who will receive a monthly check for life from a defined-benefit plan, those checks combined with your Social Security would amount to an annual retirement income of bit over $30,000, assuming the averages. That’s not a bad income, especially since many expenses really do drop in retirement (though some retirees go nuts with the cruises and RVs). But here comes the bad news: Most pensions don’t adjust for inflation. So an $18,000 benefit today would be able to purchase just $13,274 worth of goods in a decade, assuming a 3% annual inflation rate.

Oh, and there’s another little issue. Social Security and many (if not most) pensions may not have enough money to pay off projected benefits.

The bottom line is this: If you want an above-the-poverty-line retirement, and you want to feel comfortable that it will stay that way for the length of your retirement, then you must save, save, save, and then save some more.

It’s obvious, I know. At least, I think it is. But clearly not everyone is getting the message.

The EBRI reports that “among all families with a defined-contribution plan [such as a 401(k)] in 2007, the median (mid-point) plan balance was $31,800…Among all families with an IRA/Keogh plan, the median value of their plan was $34,000 in 2007…” Keep in mind that those are figures as of 2007, before the stock-market crash last year. So if we assumed that someone had both an average-sized 401(k) and average-sized IRA, then they’d have savings of $65,800 or less. That would be a nice chunk of change to find in the sofa cushions — but it wouldn’t last long as a primary source of living expenses.

How much do you need to save?

In a previous post, I described how you could use an online financial calculator to estimate when you can retire given your current savings rate, how much you need to save now to retire when you want, and the impact of various scenarios (e.g., working part-time in the first few years of retirement, downsizing to lower-cost living arrangements, etc.). As I wrote then, these calculators aren’t crystal balls; the future is just too unknowable. But they will provide a very enlightening estimate of whether you’re on track, and what changes will have the biggest effects on your retirement success.

Furthermore, they show the long-term benefits of saving. Go ahead, run your numbers, and then do it again, but this time assume you’ll save, say, an additional $200 a month. Chances are, you’ll be impressed, especially if you’re on the young-ish side.

Or for a different take, fill out a retirement calculator and assume you don’t save another dime. Then see what kind of retirement you have in store. For most people, it won’t be pretty…and that might provide a necessary kick in the pants.

I’ve confessed before that, despite being the retirement-planning guy at The Motley Fool, I don’t plan to fully retire. Yet I continue to max out my 401(k), year after year. I know there may come a time that I may no longer be able to work, and it’s also likely that I’ll join that Great Tax Shelter in the Sky before my wife. I save now because I want my future enfeebled self and widowed wife to be taken care of.

So do a big favor for your future self and (if you’re the marrying type) your future spouse: Save, save, save, and then save some more.

A stiff upper lip

Finally, on an unrelated note: If you’d like to spend money right now rather than save it, but you’d prefer it goes to a good cause, and you’d like the added bonus of seeing some really horrible collections of facial hair, support this year’s Mustaches vs. Cancer campaign.

Along with five other Motley Fools, I am participating in this two-month mustache-a-thon (much to the chagrin of our female friends). You can sponsor my ‘stache at my profile page. Yes, I know it looks like a balding caterpillar died on my lip. But it’s only been a couple of weeks, and it raises money to help kids with cancer. So give a hoot, support my snoot!

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