Workers Saving too Little (Does This Surprise Anyone?)

From today’s WSJ

Fifty-seven percent of U.S. workers surveyed reported less than \$25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute. Only 49% reported having so little money saved in 2008.

I found the report and thought this graphic that breaks down savings by age group was troubling:

Only 42% of those 55 and over have a \$100,000 or more in retirement savings. Wow! What kind of retirement, if any, can they (or the other 58%) plan on having?

Even worse is the fact that a lot of people have no idea how much they will need during retirement. Here is a quote from one part of the report:

Forty percent of all workers think they need to accumulate at least \$500,000 by the time they retire to live comfortably in retirement. Twenty-one percent feel they need between \$250,000 and \$499,999, while 29 percent think they need to save less than \$250,000 for a comfortable retirement…

Consider this:

A lump sum of \$250,000 placed in a 20-year fixed immediate annuity with a 3% to 5% interest rate, will produce an annual income of \$16,000 and \$19,000. Even combined with social security income, that’s hardly a comfortable retirement.

Thoughts?

401(K) Dollar Limit Raised to \$17,500 in 2013

The maximum dollar amount an employee can contribute to their 401(K) is increasing \$500 to \$17,500 for 2013. Those who are 50 and older can contribute as much as \$23,000.

Let’s break down \$17,500.

That’s…

\$1,453.33 per month.
\$47.95 per day.
\$1.9977 per hour (based on 8,760 hours per year).
\$.0333 per minute.

Better get to saving.

Oh, and in case you’re interested…

The geometric average monthly rate of return for the S&P 500 Index since 1926 is .779%. If a person invests the maximum of \$1,453.33 per month for 25 years and gets that kind of return, they could have \$1.75 million.

Estimating Retirement Income Needs – A Waste of Time?

Emily Brandon over at the U.S. News & World Report’s Planning to Retire Blog recently wondered if online retirement calculators were helpful or useless. In her post, Emily references a post by Salon’s Heather Havrilesky titled Perspire to Retire!, in which she basically blames online retirement planning calculators for screwing up her retirement plans:

…one day I decided to try out an online retirement calculator, just to reassure myself that we were well on our way to not just a secure financial future but also a rosy one. I plugged in my age (38), my current retirement savings (respectable), my desired income upon retiring (50K) and a few other figures, and pressed “calculate” with a little smile on my face, ready to be praised for my prudent savings and congratulated on the happy, golden years ahead.

“To retire with an inflation-adjusted retirement income of \$50,000 for 20 years would require \$3,075,744.65 in savings by the time you retired at 65. You need to save an additional \$47,613.58 each year to reach your retirement goal.”

Sweet Jesus. Three million dollars? Forty-seven thousand dollars a year? How is that even possible?

I don’t know what numbers she was plugging in because I got nowhere near the numbers she claims the calculator gave her—no matter how much I played around the with calculator. I did notice the retirement calculator’s default inflation rate is 4%, which seems a bit high based on the long-term historical average. I even plugged her info into my retirement planning calculator and I got nowhere near her numbers.

Anyway, I don’t think retirement planning calculators are useless. Just because they say people need to save more than they think they do, doesn’t make them bad. I mean, would you rather have a false sense of security rather than the truth? People NEED TO WAKE UP and realize that retirement will be more expensive than they think it is—especially if they want to do more than hang out at the local bingo joint.

I guess my point is: don’t let them get you down. Save as much as you can and DON’T WORRY ABOUT IT!

Question From a Reader: How Do You Know When Enough is Enough?

A couple of weeks ago I received this email from a reader named Katy:

Hi there,

So I have a question that’s been eating at me. When it comes to savings how do you know when enough is enough? How can you figure out when to relax?

Right now I’m in the process of saving as much as possible, but I find I feel stressed out about the money I have saved and worrying that I won’t have enough. That is how I came to the question of how do I know when I have enough anyway? I’m not sure what the goal I’m looking for is. I imagine other people probably wonder the same thing.

-Katy

P.S. Keep up the good work, your site is incredibly helpful to us and I’ve hooked a bunch of my friends and family on it too.

It’s impossible to know when enough is enough if you have no savings goals. So, the first place to start is with setting some financial goals. Goals like:

1. An emergency fund
2. Down payment on a house
3. Future car purchase
4. Retirement
5. College funding for your kids or grandkids
6. Any other short or long-term purchase that will require significant money

Once you know what your goals are, it’s relatively easy to know if you’re on track or not to meet those goals. The exception of course is retirement, which can be tricky to figure out since it is usually decades away. Although it is far from perfect, one place you could start is with a simple retirement planning calculator I put together. Like I said, it’s not perfect, but it will give you some idea of how much you need to be saving in order to meet your retirement goal. Once you have some sort of goal, you can analyze your progress on a yearly basis to see whether or not you’re on track to meet that goal and make adjustments as necessary.

What about you? How do you know when enough is enough? I’m sure this reader would appreciate your input.

Question of the Day – 401(k) Loans

Here’s today’s question(s) of the day:

Do you think it is too easy for people to borrow from their 401(k) plans? Have you ever borrowed from your 401(k)?

My wife and I have borrowed against her 401(k) when we bought our house in 1999. This was back in the day when her 401(k) was our only source of meaningful savings. Although it worked out well for us, I can’t say that I would recommend it for everyone.

I’m Concerned With Generation X’s Retirement Goals

This past week I received an email about a survey that Charles Schwab conducted called Rethinking Retirement. I went to their website and decided to take their survey. At one point in the beginning of their survey it asked “How much money do you think you need to retire?” To come up with some sort of answer that wasn’t directly pulled out of my you-know-what, I ran some numbers using my little retirement calculator. My calculator told me that I would need somewhere in the neighborhood of \$3.9 million so that’s what I entered. It then asked me for my birthyear and then it took me to this screen:

The average Generation Xer who took the survey thinks they will need \$1.2 million to retire on. I gotta tell ya, I don’t think that’s enough. Let’s think about it for a minute. Here’s a look at the possible first-year income on \$1.2 million based on three different withdrawal rates:

Not too bad until you consider the fact that these numbers don’t include inflation. If the average Gen Xer is my age (38) they have about 27 years until retirement if they retire at 65. Here’s a look at the numbers after you adjust them for a 3% inflation rate over the next 27 years (I realize inflation has been running higher than 3% as of late, but 3% has been the long-term inflation rate):

Call me crazy but I just don’t see \$21,000 to \$26,000 (I wouldn’t recommend a 6% withdrawal) as being a comfortable retirement income. Sure, there will be some Social Security income available but I can’t imagine it being more than \$20,000 to \$25,000 per year. Including Social Security, you’re looking at an income of \$41,000 to \$51,000 per year in today’s dollars.

Is it enough? I don’t think so. What about you?