When Is It Enough? (Retirement Funds)

[Kay7979]

I don't personally know anyone who has inherited a large amount of money, so it seems to me somewhat unlikely that a majority of non-savers are expecting large inheritances. Would the windfall come from life insurance? Or would they be inheriting the parents' savings? If the parents are no better savers than the typical American today, the most the children will inherit is $50,000 and the family residence. That's hardly enough for anyone to live on for a couple decades in retirement.

I think lot of people feel they can scale back and live off Social Security. I bet, like me, they don't know how much in SS they are eligible to receive, and they may be overestimating it a great deal. I have never looked up what I might expect to receive, since I think the situation will change in the next few years and whatever the amount is quoted at now, may be substantially different by then.

Other thoughts: Perception is everything: If people have lived most of their lives barely able to make ends meet, (the paycheck to paycheck part of our population, which statistics say is 70% ???) but they have managed to save in 401Ks or IRAs $50,000 as mentioned in the retirement survey, $50,000 probably seems like a vast sum of money to them. They aren't planning to live on that money day to day, they are just planning to supplement the budget when large expenses arise. The problem is, SS or pensions may not be anywhere near enough to support them, and they will need to supplement their income, to a much greater degree than they thought, from that modest nest egg.

 

[disneysteve]

It's just scary when I look at the calculators of how much we would likely need to retire at 65 and it's saying things in the millions and I go and look at another calculator and it says to acquire that much we should be saving approximately 1/3 of what my DH makes each year

Something doesn't add up there. At your age, saving 8-10% of your annual gross should put you on track for meeting your retirement goals. Starting later in life, like 35, that number may rise to 15-20%.

If you came up with figures saying you needed to save 30%, something was off on those calculations.

One rule of thumb is you will need savings equal to about 25 times your pre-retirement income. So if, when you retire, you are earning 50K, a nest egg of 1.25 million would allow adequate spending with little risk of outliving your money.

For example, at your age, 25, just funding 2 IRAs with 4K each every year and earning 7% you would end up with 1.7 million at age 65. You are in a great position because you are so young. You can get a huge benefit from compounding interest over the next 40 years. Just relax, live below your means and keep saving. As your income rises, resist the temptation to just increase your spending. Its okay to spend more as you earn more, but always devote part of the raises to increased saving and you'll do just fine.

 

[robsmom]

I have followed this thread from the beginning. What it has made me realize is that the scariest part of retirement savings is really the unknown. I want a magic ball that tells me how long I am going to live and am I going to be healthy. Should i splurge on great vacations now because when I am 65 I won't be healthy enough or will I have 20 years of retirement travel to see the entire world! Unfortunately, I don't have the magic ball so for now all I can do is save and hope that I get to use the money. I think some of the disconnect in the survey is that people don't really know the future so they are optomistic.

What seems like a huge amount of money now doesn't turn out to be so big 20 or 30 years into retirement. I think many people who are now say 45 would be thrilled if they were told they would have $1 million when the retired in say 2026. But by 2050 will they still think that was enough?

I have a defined pension plan (for now) that has a retirement age of 58 and includes health care. We have pensioners who have been retired for 35 years and are drawing a few hundred dollars a month. When they retired in 1970, I think they thought they had a very secure retirement, with the pension, SS, retirement health care and a house that was paid off. Now they don't seem so secure as they get asked to contribute more and more for health care each year!!

 

[dvcgirl]

The way I read it they were not considering pensions. Do the 40% may only need $25K to have a happy retirement if they get a good pension and SS.


This would be a good retirement, not world travels but not eating cat food.

A year or two ago I was a survey on how were you planning on funding your portion of retirement (not SS or pension) and they got 3 answers that were chosen by ~33% of the participants. The 3 answers were inherit, win lottery and save. So only 1/3 rd of the people were planning for it the other 2/3 rds were looking for a windfall. Some will win the lottery and some many actually get a large enough inheritance, but they will not be the majority of the 2/3 rds group.

Not many people inherit money at all actually, and the vast majority who do inherit money will inherit little. There was an article in the Times on this just about a week ago....I'll post the link since it's long.

Here's a blurb for those not interesting in reading the entire article....

"Though hundreds of billions of dollars are being passed on every year, most elderly Americans can probably forget about passing on a financial lifeline to their children.

The latest numbers confirm that a vast majority of baby boomers cannot count on an inheritance to help them out of their jam. Even as the total pile of wealth passed down the generations has increased sharply, the inheritance received by a typical American has declined. The shift can be explained in part by demographics changes, but also by the changing nature of old age (life expectancy has increased) and retirement financing (rather, the lack of it).

In 2004 median inheritances — half were bigger and half were smaller — amounted to about $29,000 in today's money, according to a Federal Reserve analysis of the Survey of Consumer Finances. That is enough for the heirs to buy a new Pontiac Coupe. But for almost all, it is hardly life-changing money.

Nor are inheritances likely to increase. According to the analysis of the Fed data by Mark Zandi of Moody's Economy.com, 30 years ago the median inheritance was about $10,000 more, adjusted for inflation.

These meager bequests would seem to fly in the face of the huge transfer of wealth making its way down the generations.

Yes, big money is being passed down. According to the Fed data, the overall pie of inheritances has grown to nearly $200 billion annually — more than three times the amount that was passed down in the mid-1970's, after accounting for inflation. Paul Schervish and John Havens of Boston College's Center for Wealth and Philanthropy predict that by midcentury, $25 trillion will be passed from the old to their offspring.

But the typical American is seeing little of this wealth. Mr. Schervish and Mr. Havens found that most money would go to a few lucky heirs: 7 percent of the estates would account for half the aggregate bequests. "

http://www.nytimes.com/2006/03/26/w...tml?ex=1144296000&en=3dd505f9379405b9&ei=5070

 

[dvcgirl]

I have followed this thread from the beginning. What it has made me realize is that the scariest part of retirement savings is really the unknown. I want a magic ball that tells me how long I am going to live and am I going to be healthy. Should i splurge on great vacations now because when I am 65 I won't be healthy enough or will I have 20 years of retirement travel to see the entire world! Unfortunately, I don't have the magic ball so for now all I can do is save and hope that I get to use the money. I think some of the disconnect in the survey is that people don't really know the future so they are optomistic.

What seems like a huge amount of money now doesn't turn out to be so big 20 or 30 years into retirement. I think many people who are now say 45 would be thrilled if they were told they would have $1 million when the retired in say 2026. But by 2050 will they still think that was enough?

I have a defined pension plan (for now) that has a retirement age of 58 and includes health care. We have pensioners who have been retired for 35 years and are drawing a few hundred dollars a month. When they retired in 1970, I think they thought they had a very secure retirement, with the pension, SS, retirement health care and a house that was paid off. Now they don't seem so secure as they get asked to contribute more and more for health care each year!!

You hit on a lot of good points here. What sounds like a ton of money to us all now, won't sound like much down the road. Think about not only health care, but property taxes, homeowners insurance, fuel prices....all those things that seem to just keep going up and up with no end in sight. I remember an elderly woman who called the Dave Ramsey show. They were in their 70s, and running out of money. The big culprits were property taxes and health care/prescrption drug costs. They were sitting on a lot of equity in their NJ home, but they didn't want to move. In short, they were in a pickle.

And while many pensions and SS have cost of living increases that come every now and again, we all know how that can go. What were we all paying for gas just two years ago compared to what we pay now? Have the cost of living increases kept pace?

I'm with you though, I'd love to have that crystal ball.

 

[MrsPete]

I think far too many people are banking on inheritance for their own retirements..

This may have been realistic in previous generations. In the past, more people owned small businesses, which could be passed on to the children. Today, however, most big wage-earners are able to command big bucks because they have an education and specialized skills -- not things they can pass on to their children.

Also, today people are living longer, and they're using up their money -- especially on health care related things. People are traveling more, living in larger houses, giving more to their grandchildren; the result is that their estates will be smaller.

People who're counting on inheritance are -- in large part -- going to be disappointed.

 

[MrsPete]

Wow I just decided to take a peek over here and read this whole thread. At the rate we're going DH and I will never retire. I really am scared of that but we're only 25 so maybe we have time to change.

You don't need to worry. You have one of the biggest assets on your side: TIME. Start maxing out your 401Ks, watch your spending (splurge on what matters, skimp on everything else), and you'll see results quickly. We started to feel "comfortable" around 30.

 

[MrsPete]

22% are very confident about retirement but are saving nothing.

61% expect pension income even though only 40% actually have a pension plan.

50% think they can maintain their current lifestyle on 70% or less of what they currently earn.

We are a nation of financial idiots. Why? Because we allow the popular media to educate us about financial matters. We believe that we "save" by going to the store on certain days when prices are lower. We believe that tax refunds are free money. We believe that bringing home more money is the answer to our financial woes. We believe that credit card lenders are doing us a favor by "giving" us money.

Oh, what's going to happen to us as a nation?

 

[robsmom]

We are a nation of financial idiots.

Oh, what's going to happen to us as a nation?

After this survey I think I have to agree with you!! I actually can acutally sort of get that people think they area secure. Maybe they are optimists and those of us who think SS may not be around are pessimists!

but "61% expect pension income even though only 40% actually have a pension plan.

This one just blows my mind, I have have a pension plan and don't epect pension income.

 

[MrsPete]

I bet, like me, they don't know how much in SS they are eligible to receive, and they may be overestimating it a great deal. I have never looked up what I might expect to receive, since I think the situation will change in the next few years and whatever the amount is quoted at now, may be substantially different by then.

I get a mailer from SS every year near my birthday stating how much I can expect if I retire at 62, at 65, etc. as well as how much I could expect if I become disabled.

I could live on what I'll get from SS only if I lived with one of my children, but that's not in the plans. I don't want to be a financial burden to them.

If you're not receiving something simliar, here's a website with a very complicated formula that'll let you figure what you might get: http://www.heritage.org/Research/SocialSecurity/wm143.cfm#4

Of course, the real question for those of us who're younger is whether SS will change its policies in the 20+ years before we become eligible to get back any of our money!

 

[punkin]

I don't see what's so misguided about assuming you will need 70% of your income to retire. Assuming your house is paid off, your children are out of the house and you go down to one car (all realistic assumptions for my family at this point), I think I can make it on 50% of my current income (also have to assume I will not be saving for retirement-a huge chunk of money)

The only expense I can see increasing is health care and if that increases to what my mortgage is now, I won't need retirement because I will die from shock.

 

[dvcgirl]

We are a nation of financial idiots. Why? Because we allow the popular media to educate us about financial matters. We believe that we "save" by going to the store on certain days when prices are lower. We believe that tax refunds are free money. We believe that bringing home more money is the answer to our financial woes. We believe that credit card lenders are doing us a favor by "giving" us money.

Oh, what's going to happen to us as a nation?

The first sentence of this post made me chuckle, but it's not a laughing matter. Everything you say here is so very true. Maybe there is a little hope though, at least on the education front. My 14 year old cousin is a freshman in high school and he's taking Personal Finance as an elective course. It would be nice if it was mandatory, but back when I was school nothing like that was offered.

 

[dvcgirl]

I don't see what's so misguided about assuming you will need 70% of your income to retire. Assuming your house is paid off, your children are out of the house and you go down to one car (all realistic assumptions for my family at this point), I think I can make it on 50% of my current income (also have to assume I will not be saving for retirement-a huge chunk of money)

The only expense I can see increasing is health care and if that increases to what my mortgage is now, I won't need retirement because I will die from shock.

I could live on 50% of our income...we're living on 60% now and we're helping a relative out with college costs which is a temporary thing. We also have no debt at all, and if we had just another 10% of our income to play with...surely we would not starve, and I'm sure we'd be living in smaller digs...which would free up some money. But health care costs are rising at an alarming rate. Also, owning a home outright I can tell you that we spend a pretty penny just maintaining and insuring this place. And so, just that extra 10% isn't going to be enough "fun" money for us. Right now we generally take one nice trip a year, and a few smaller ones. When we retire, with all that endless free time, along with other local interests I just know we're going to want to travel.....everywhere. And so for people like us, and there are definitely a bunch like us, 70% won't cut it. It really is a personal thing....

 

[ZPT1022]

My 14 year old cousin is a freshman in high school and he's taking Personal Finance as an elective course. It would be nice if it was mandatory, but back when I was school nothing like that was offered.

Ahhh- this is something DH and I talk about a lot. I hate to say bad things about our parents but this is one area they really failed to prepare us for, DH's especially. They LOVE their credit cards and always carry a large balance. So when we were 18 (he's my high school sweetheart ) we thought all those credit cards were like free money We furnished out first apartment on credit, went on the Millenium sailing of the DCL, and all sorts of other crazy things that we had no business doing at that age and with what we made then. We moved back home to bail ourselves out and it sucked. I really hope to educate my kids about finances much better than that. We've actually started already even though the oldest is only 4. We will talk to her like an adult. We went to the zoo two weekends ago and she asked if we could go out to dinner on the way home. We explained to her that we could either go to dinner or take our passes from the day back to the zoo and turn them into an annual family plus one pass. It would be the same price, one (unhealthy) dinner out or a YEAR at the zoo with the option to bring Grandma or a friend every time. Even at four when we presented it that way she was able to see what was the better option (the yearlong zoo pass). I think it's all about educating them and starting young. I wish someone would have for us. But as much as she will listen to us at age four I don't know how she'll feel at 14. This is where I wish that the schools would teach more financial basics and personal responsibility classes. Not because I'm not willing to teach my kids at home but they definitely do reach an age where they would rather not hear it from Mom & Dad.

 

[crisi]

I think you are correct. After talking to a lot of different people including family members, a lot of people expect to fund their retirements by inheriting from parents and grandparents. In our family alone I think there will be some disappointment when the inheritance does not happen quite like they hoped or wished.

A lot of people think the LOTTERY is a reasonable retirement strategy.

I suspect one issue with inherientance is that we've made money such a private topic that its private even within our own families. People perceive their parents and grandparents as having money, because they've always SPENT money (which is sort of the opposite of having it). Since they don't talk to their families about money, they have little perspective on how much is there. They also seldom plan for the reality of old age - expensive health care, long term care - which can eat away any nest egg they have. So "Mom" may not have a lot of savings, but she has that house we will sell - until you sell it and it only pays for 18 months of the three years she is in a nursing home.

Moreover, if someone does die with money, its usually split between several heirs. People really don't get that $70,000 (what was left of my own grandmothers estate) split between five children is only $14,000. And that $14,000 just isn't a lot of money.

Finally, because people live so much longer, and the generation passing on now had their kid fairly young, there is a good chance that "Mom" won't pass on until AFTER you retire yourself. A $14,000 kick start to your retirement savings when you are 21 has time to grow (or a $14,000 kick start to life when you are young helps out a lot). $14,000 when you are 65 yourself - well, I wouldn't turn it down, but it isn't the same.

 

[disneysteve]

But as much as she will listen to us at age four I don't know how she'll feel at 14.

If you do a good job with her at 4 and 5 and 9 and 12, by the time she's 14, she won't need a personal finance class. Our DD is 10 and we've been working on her for years now LOL! She knows all about savings, spending, compound interest, stocks, credit cards, etc. She knows how to compare unit prices at the supermarket - not just buy the biggest package. She knows to compare store brands to brand names. She knows why we buy certain things at the grocery store and other things only at Target or Wal-Mart. She balances our family checkbook every month and I periodically discuss what various household bills cost so she understands how expensive it is to run a household. DW and I are pretty confident that she won't be one of those college kids running up thousands of dollars in CC debt a few years from now. So kudos to you for starting to teach her young. It will pay off later.

 

[dvcgirl]

A lot of people think the LOTTERY is a reasonable retirement strategy.

I suspect one issue with inherientance is that we've made money such a private topic that its private even within our own families. People perceive their parents and grandparents as having money, because they've always SPENT money (which is sort of the opposite of having it). Since they don't talk to their families about money, they have little perspective on how much is there. They also seldom plan for the reality of old age - expensive health care, long term care - which can eat away any nest egg they have. So "Mom" may not have a lot of savings, but she has that house we will sell - until you sell it and it only pays for 18 months of the three years she is in a nursing home.

Moreover, if someone does die with money, its usually split between several heirs. People really don't get that $70,000 (what was left of my own grandmothers estate) split between five children is only $14,000. And that $14,000 just isn't a lot of money.

Finally, because people live so much longer, and the generation passing on now had their kid fairly young, there is a good chance that "Mom" won't pass on until AFTER you retire yourself. A $14,000 kick start to your retirement savings when you are 21 has time to grow (or a $14,000 kick start to life when you are young helps out a lot). $14,000 when you are 65 yourself - well, I wouldn't turn it down, but it isn't the same.

Yes, the sibling thing comes into play....especially for the Baby Boomer generation who were generally large families. A small interitance isn't going to amount to much if you have 3-4 siblings. The Times article I posted said that 1/2 of all money passed down to heirs is contained in the top 7% of estates. And then factor in that our parents are living longer and longer....they're going to spend most if not all of the money that they saved.

 

[MrsPete]

Ahhh- this is something DH and I talk about a lot. I hate to say bad things about our parents but this is one area they really failed to prepare us for, DH's especially . . . This is where I wish that the schools would teach more financial basics and personal responsibility classes.

If we believe the stats that say most people are living paycheck to paycheck, it's not that parents don't WANT to educate their children about finances, it's that they DON"T KNOW HOW to do it.

Schools ARE teaching the skills for personal responsibility: I specifically remember an algebra teacher teaching us how compound interest is calculated and how much a house costs in the long run. Then I specifically remember him having us all repeat, "I want a simple interest, no prepayment penalty loan" over and over again out loud!

The thing is that kids don't generalize the material to thier own lives. They KNOW that interest costs money, but they aren't taught the self-discipline to say, "I don't need this item as much as I need financial stability."

 

[dvcgirl]

If we believe the stats that say most people are living paycheck to paycheck, it's not that parents don't WANT to educate their children about finances, it's that they DON"T KNOW HOW to do it.

Schools ARE teaching the skills for personal responsibility: I specifically remember an algebra teacher teaching us how compound interest is calculated and how much a house costs in the long run. Then I specifically remember him having us all repeat, "I want a simple interest, no prepayment penalty loan" over and over again out loud!

The thing is that kids don't generalize the material to thier own lives. They KNOW that interest costs money, but they aren't taught the self-discipline to say, "I don't need this item as much as I need financial stability."

And while it's wonderful for parents to talk to their kids about finances, well, that does little if you don't practice what you preach. My parents certainly weren't as vocal in teaching as DisneySteve describes he is with his daughter. However, like Steve, they lived beneath their means. We learned by observation mostly. Our parents didn't just "talk the talk", the walked the walk....

 

[kfeuer]

And while it's wonderful for parents to talk to their kids about finances, well, that does little if you don't practice what you preach. My parents certainly weren't as vocal in teaching as DisneySteve describes he is with his daughter. However, like Steve, they lived beneath their means. We learned by observation mostly. Our parents didn't just "talk the talk", the walked the walk....

Best case scenario is a combination of the 2! My parents are very conservative and have always lived within/below their means. However, they never sat me down and explained why they made certain decisions. For example, my mom inherited some money and they put it all in savings. That was definitely a good financial move, but from a kid's perspective it seemed so boring. When I got out on my own I financially rebelled for awhile, and then had to dig out of it. I made some really dumb decisions in my 20's that I wish I could take back. I know if I'd been better educated financially I'd have made better choices. So, for my own kids I want to both set a good example and proactively teach them how to manage their money. It's already starting to sink in with my 5-year old...it makes me smile to hear him tell my 3-year old "No, we can't get any toys today, they're not on sale" or "No, we can't get that because mommy doesn't have a coupon".