Boomers Find 401K Plans Come up Short....

[dvcgirl]

I haven't posted one of these articles in awhile, but this is a good one. The article says that the "average american" will need $636,000 in their nest egg in order to produce 39K a year in retirement. That 39K will supplement the 35K that they will receive in retirement.

The median 401K balance for this group is $149,000....so, less than 25% of what is needed.

They're working off the median income for 62-65 year olds which is about $87,000. And saying that retirees need 85% of their income in retirement. I've seen that percentage creeping up over the years. I used to see numbers as low as 70% of their income, but many retirees say that number didn't work for them and ended up working part-time.

I noted right away that they're making some pretty big assumptions on the returns of the nest egg in retirement. The retiree would need to get a 6% return in order to throw off 39K a year without running out of money before they die.

Anyway, I found it interesting and thought others here would too. We'll be seeing a ton of these types of articles in the coming years.

http://online.wsj.com/article/SB10001424052748703959604576152792748707356.html

 

[crjack]

Thank you for posting the article. For me the big question is the income outside of 401K. I'm 45 and DH is 46 and we know that social security will probably not be the same as it is now by the time we retire.

We've never had pensions as an option during our careers (only 401K's). We just received our soc. security benefits statement but we know we cant count on those numbers.

We're planning on working as long as possible but the reality is that choice isnt always there for many workers, as we've seen first hand recently. And our job market is much better here in Boston than it is in other parts of the country.

Healthcare is another huge variable with any budget, but particularly in retirement.

The issues in WI and other states is just the tip of the iceburg I think.

 

[DisneyHumbug]

Interesting article. I often wonder if the numbers they throw around are per couple or for a single. I think the cost for housing would be the same, but the cost for food, clothing and entertainment would be less. I think it also depends on the lifestyle you plan to have in retirement. With a lot more time on your hands, you tend to spend a lot more!

 

[Darcy03231]

Interesting article. I often wonder if the numbers they throw around are per couple or for a single. I think the cost for housing would be the same, but the cost for food, clothing and entertainment would be less. I think it also depends on the lifestyle you plan to have in retirement. With a lot more time on your hands, you tend to spend a lot more!

Actually, I would think the housing cost would be less. Most everyone I know plans to have their house paid off before retirement. In our case, not only will the house be paid off, but we plan to downsize considerably (we currently have a 5 bedroom, 3.5 bath home) so our housing costs should decrease.

 

[HHSTigerFan]

This is something we NEVER thought would effect us, both state employees that are supposed to be getting pensions equal to 80% of our highest earning years plus an annual COL increase.. But with whats happening around the country, our view will have to change.. I am sure there will still be a pension, but will either be less than 80%, we will have to put in more than 35 years service, contribution will increase from the current 9% of our income or a combo of the 3..

 

[dvcgirl]

Thank you for posting the article. For me the big question is the income outside of 401K. I'm 45 and DH is 46 and we know that social security will probably not be the same as it is now by the time we retire.

We've never had pensions as an option during our careers (only 401K's). We just received our soc. security benefits statement but we know we cant count on those numbers.

We're planning on working as long as possible but the reality is that choice isnt always there for many workers, as we've seen first hand recently. And our job market is much better here in Boston than it is in other parts of the country.

Healthcare is another huge variable with any budget, but particularly in retirement.

The issues in WI and other states is just the tip of the iceburg I think.

All excellent points. And all good reasons to become a "super saver". DH and I are fortunate enough to make a really nice income, but we've sort of "seen the writing on the wall" and have increased our savings to the point where we save 60% of our net income.

Now, I get that most people can't do this and have any sort of fun during their working lives, but we've decided to live ultra-frugally in some parts of our lives so that we can still have fun and save the way that we do.

As for Social Security, I think it's a very safe bet to say it will be there in some form. I've seen estimates that even the highest income earners can count on receiving 70% of the estimate that you get each year from the IRS.

Still, as you point out, for many seniors, healthcare costs outside of what medicare covers can eat up a good portion of your Social Security check.

Anyway, a bunch of us around here have been talking about this for years, and so this is the latest article I've seen. Now that the boomers are starting to retire, or should I say, attempting to retire, we're seeing the beginning of the mess unfold.

And this will affect employment for those of us who are coming up behind the boomers. If all of these people can't retire, it doesn't bode well for unemployment numbers ever getting back into the 5% range.

 

[dvcgirl]

Interesting article. I often wonder if the numbers they throw around are per couple or for a single. I think the cost for housing would be the same, but the cost for food, clothing and entertainment would be less. I think it also depends on the lifestyle you plan to have in retirement. With a lot more time on your hands, you tend to spend a lot more!

Well, I think that what recent retirees have found is that some costs go down, like commuting and perhaps the mortgage is paid off, but other costs go up significantly, like healthcare and possibly insurance (for long term care insurance). Those two things can easily offset the money saved by no longer working.

And like you pointed out, retirees want to enjoy themselves, and find that their discretionary spending goes up, especially early in retirement when they are healthier. And so 70% won't always cut it.

It's an eye-opener of an article for folks who are new to the topic.

 

[dvcgirl]

This is something we NEVER thought would effect us, both state employees that are supposed to be getting pensions equal to 80% of our highest earning years plus an annual COL increase.. But with whats happening around the country, our view will have to change.. I am sure there will still be a pension, but will either be less than 80%, we will have to put in more than 35 years service, contribution will increase from the current 9% of our income or a combo of the 3..

You are a wise person to see this, and to accept it. I know a *lot* of state and municipal workers who are in complete denial over what is happening. The money simply isn't there in many states to keep the promises that have been made.

 

[BuzznBelle'smom]

Well, we've always tried to live frugally--it was a lot easier before we had 4 kids, believe me! We don't have pensions, but do have 401(k)'s. Surprisingly, ours have much more in them than the median--surprising only because we've only done 6-7%, and are in our 40's.

The thing that killed me about that article, is people actually thinking that they'll get their full Social Security amount. Seriously? Dh and I are at the tail end of boomers, and we never, ever thought we'd get SS. That's why we've done so much in our 401(k) plans.

At least for now, our tentative retirement plan involves DH working a couple months out of the year. I might work, too (still home with kids for now). I don't have a lot of sympathy for people who expect to fully retire at 65, having done little planning or saving. Why should they get to lie around while everyone else supports them? I thinhk the SS retirement age needs to go up significantly. If you want to retire earlier, that's fine--just do it on your own dime, if you have one.

 

[Marionnette]

Unfortunately, for many boomers the idea of putting aside 12%-15% of their income (as recommended by Vangard) is unattainable. Between the mortgage, the kids' college costs, skyrocketing medical insurance premiums and stagnant wages, there's not a lot left over after the bills are paid. And the less you make, the more you will feel the pinch. You might as well try to tell the sun not to rise tomorrow. I have a feeling that working as a greeter at Walmart is not going to be enough for many retiring boomers.

 

[dvcgirl]

Well, we've always tried to live frugally--it was a lot easier before we had 4 kids, believe me! We don't have pensions, but do have 401(k)'s. Surprisingly, ours have much more in them than the median--surprising only because we've only done 6-7%, and are in our 40's.

The thing that killed me about that article, is people actually thinking that they'll get their full Social Security amount. Seriously? Dh and I are at the tail end of boomers, and we never, ever thought we'd get SS. That's why we've done so much in our 401(k) plans.

At least for now, our tentative retirement plan involves DH working a couple months out of the year. I might work, too (still home with kids for now). I don't have a lot of sympathy for people who expect to fully retire at 65, having done little planning or saving. Why should they get to lie around while everyone else supports them? I thinhk the SS retirement age needs to go up significantly. If you want to retire earlier, that's fine--just do it on your own dime, if you have one.

Well, I think part of the problem is that boomers think that they'll simply keep working. What if they can't, due to health reasons?

I don't know how anyone gets to retirement with 149K in retirement, earns 87K a year and thinks that they have enough to retire. The person in the article who went in to meet with a retirement planner and found out that she has a "5% chance of success" of retiring now with her current nest egg.

I mean, do these people have access to the internet? There are retirement calculators galore out there....and ones that do just that, show you your chance of success in retiring with what you believe you'll have by that point.

Mostly, I think Americans are just terrible savers (Budget Boarders...well, we're different , and I think that they just don't want to think about it, or that they somehow just think it will all work out because their parents retired.

Honestly, I don't get it. The people in the photos look horrified...and surprised by their situation. How did they not see this coming?

 

[dvcgirl]

Unfortunately, for many boomers the idea of putting aside 12%-15% of their income (as recommended by Vangard) is unattainable. Between the mortgage, the kids' college costs, skyrocketing medical insurance premiums and stagnant wages, there's not a lot left over after the bills are paid. And the less you make, the more you will feel the pinch. You might as well try to tell the sun not to rise tomorrow. I have a feeling that working as a greeter at Walmart is not going to be enough for many retiring boomers.

I agree with you, to a point. I do think that housing, education and health care costs have skyrocketed, way ahead of inflation in every case.

However, we've had a million conversations around here about lifestyle....and about our family's lifestyle when we were kids (I'm 43), and that of the average American family today.

Many Americans have sacrificed savings to keep up lifestyle in many cases. You know what I'm talking about....vacations, kids activities, eating out. That stuff will absolutely destroy a family's ability to save.

Granted, it's increasingly difficult to save, but it has to be a priority. We've chosen to live in a house that is way less than we could "afford" in order to not have a mortgage and drive very old cars. Living in that fashion, we can afford to save a lot and still travel and have a nice discretionary spending amount to keep us happy in our day to day lives.

It is about sacrifice though...even for the upper income earners. It's much, much harder for people who earn less...there's no doubt about it.

 

[Disneefun]

Here's a question for the financial gurus. When these retirement calculators spew out numbers, they ask you to input your household income, then they factor your monthly income need in retirement as a percentage of that. Okay. Now, which do you think is the "income" you really need to put in? Is it your total income, or your AGI? Having just done my taxes, I know that there is about a 20K difference in our total income and our AGI, thanks to 401k and IRA contributions.

Playing with the Vanguard calculator, if I put in total income it comes up that I'll need about 6k per month in retirement. If I bump it down to our AGI, I need roughly 4,300/month (which seems far more realistic, given our current standard of living). That's a big difference in the total nest egg I'll need to have.

Now, it doesn't matter to me personally b/c we save enough to hit the higher goal and then some. But I wonder for those who can't/don't save as much, if the lower number would be less overwhelming and possibly more realistic. I mean, if you're not spending it now (b/c it's going into your retirement fund), you shouldn't need it then.

Obviously it's a good idea to save as much as you can to cover unexpected health care, etc. and it's a good idea to aim for the higher goal if you can. But I wonder whether these calculators that ask for "income" are unnecessarily freaking people out, especially those who already save a lot and thus have a lower AGI.

Just a thought I figured I throw up for discussion.

 

[dvcgirl]

Here's a question for the financial gurus. When these retirement calculators spew out numbers, they ask you to input your household income, then they factor your monthly income need in retirement as a percentage of that. Okay. Now, which do you think is the "income" you really need to put in? Is it your total income, or your AGI? Having just done my taxes, I know that there is about a 20K difference in our total income and our AGI, thanks to 401k and IRA contributions.

Playing with the Vanguard calculator, if I put in total income it comes up that I'll need about 6k per month in retirement. If I bump it down to our AGI, I need roughly 4,300/month (which seems far more realistic, given our current standard of living). That's a big difference in the total nest egg I'll need to have.

Now, it doesn't matter to me personally b/c we save enough to hit the higher goal and then some. But I wonder for those who can't/don't save as much, if the lower number would be less overwhelming and possibly more realistic. I mean, if you're not spending it now (b/c it's going into your retirement fund), you shouldn't need it then.

Obviously it's a good idea to save as much as you can to cover unexpected health care, etc. and it's a good idea to aim for the higher goal if you can. But I wonder whether these calculators that ask for "income" are unnecessarily freaking people out, especially those who already save a lot and thus have a lower AGI.

Just a thought I figured I throw up for discussion.

For retirement calculators, you use your gross income.

You bring up your current "standard of income". And so, if you already live way beneath your means, you may not need 85%.

For example, we save 60% of our *net* income, but that's still 40% of our *gross* income. I guess I like the 60% figure because is reflects our lifestyle more realistically.

Still because we save 40% of our gross income and live on 60% of it, and are pretty darned happy with our lifestyle, (we spend 4% of our gross income on travel). We can likely increase our spending by 10% in retirement and thus increase our travel significantly in retirement....and still only need 70% of our current gross income in retirement.

But I will tell you, that's still a big, big number.

I guess what I mean, by saving so much, we've sort of trained ourselves to live on much less.

Anyway, the gross number is what you should use in retirement calculators.

 

[crjack]

This is something we NEVER thought would effect us, both state employees that are supposed to be getting pensions equal to 80% of our highest earning years plus an annual COL increase.. But with whats happening around the country, our view will have to change.. I am sure there will still be a pension, but will either be less than 80%, we will have to put in more than 35 years service, contribution will increase from the current 9% of our income or a combo of the 3..

Can I ask a question on your pension and this is not meant to start any type of debate in anyway so I hope no one changes the tone of this thread....I truly dont understand how they operate.

Most pensions for state and local employees here in MA are around the same percentage. Do you typically qualify for soc. security too or is a pension in lieu of that??

I can't imagine how high of a percentage of our 401K we would have to withdraw to reach anywhere close to 80% but that doesn't factor in soc. security so I'm guessing that is a factor.

Thank you.

 

[MrsPete]

Honestly, how can anyone be surprised by this? I've been out of college just over 20 years, and this was "news" when I was just starting my professional life. Well, let me rephrase: This crisis was predicted -- pensions were disappearing, 401Ks were fairly new, shortages were a distinct possibility. Now what was predicted has come to pass.

I can understand saying, "I knew I should, but I just didn't do it." Or even, "I just never had enough to save" (although for the vast majority of us, someone lives just fine on 90% of what we make, so most of us could save). But the woman in red looks like someone's just told her the facts of life and she doesn't like them. How do you go through your whole life, knowing what housing costs, knowing what transportation costs, etc., etc., etc. . . . and figure that you're fine with $150,000 to retire and last you the rest of your life?

dvcgirl, you do find interesting articles!

 

[punkin]

I never understood the 85% of income in retirement. I currently pay a mortgage which I will not have when I retire (if everything goes to plan). I currently save money for retirement which I will not need to do. I currently pay college tuition for one DD and save for college for another DD. These expenses will go away in retirement. I figure I can live quite well on 70% or even less in retirement. Of course the biggest unknown is healthcare, and no matter how frugal you are, there is just no pinching pennies for that.

 

[tlbwriter]

Most pensions for state and local employees here in MA are around the same percentage. Do you typically qualify for soc. security too or is a pension in lieu of that??

In my state (which I do not believe gets up to 80%) the pension is in addition to social security. I assume that's how it would be all over, since a state program can't declare you ineligible for a federal program, can they? I know there are federal pensions (railroad) that are in lieu of social security, but I'd be surprised if any state pension worked that way.

 

[BuzznBelle'smom]

Honestly, how can anyone be surprised by this? I've been out of college just over 20 years, and this was "news" when I was just starting my professional life. Well, let me rephrase: This crisis was predicted -- pensions were disappearing, 401Ks were fairly new, shortages were a distinct possibility. Now what was predicted has come to pass.

I can understand saying, "I knew I should, but I just didn't do it." Or even, "I just never had enough to save" (although for the vast majority of us, someone lives just fine on 90% of what we make, so most of us could save). But the woman in red looks like someone's just told her the facts of life and she doesn't like them. How do you go through your whole life, knowing what housing costs, knowing what transportation costs, etc., etc., etc. . . . and figure that you're fine with $150,000 to retire and last you the rest of your life?

dvcgirl, you do find interesting articles!

This has me flummoxed, too. Dh and I have ALWAYS done 401(k)s. I had never heard of them until I started my first real job, and they sounded too good to be true--put away pre-tax dollars, AND the company matches? Talk about free money! So, we've always done this to get the maximum company match. We don't expect to live high in retirement, but figure we'll need low/mid-7-figures. we're probably being cautious, but between health care and SS, who knows what we'll really need, right? I simply don't "get" how someone could have less than 200K socked away, and think it could possibly last them more than 20 years. And you should plan on living that long--you might not, of course, but you want to die before you're totally broke (or at least I do).

 

[msmayor]

Unfortunately, for many boomers the idea of putting aside 12%-15% of their income (as recommended by Vangard) is unattainable. Between the mortgage, the kids' college costs, skyrocketing medical insurance premiums and stagnant wages, there's not a lot left over after the bills are paid. And the less you make, the more you will feel the pinch. You might as well try to tell the sun not to rise tomorrow. I have a feeling that working as a greeter at Walmart is not going to be enough for many retiring boomers.

Unattainable perhaps if they are only considering NOW to save.

Unfortunately, too many young people starting out think they have plenty of time to save for retirement and don't max out their 401(k) savings right out of the gate. Doing so means they never 'get used' to having that income in their checks...it disappears into their retirement fund before they even see it and therefore, don't miss it.

If a young person has been saving like that all along they learn to live without that 'current income' and can sock away a significant sum by the time they are 40-45 and may need to cut back to help pay for college and other things.

My DH and I have been putting the max into retirement for nearly 30 years. Even through two significant down markets, we are already far, far ahead of the average - and with conservative gains will have close to four times what the "average american" will need.