I ran across an interesting article this week from the Boston Globe with another dire warning about retirement in America. It profiles the work of Alicia Munnell, a former top economist at the Federal Reserve Bank of Boston who is now the head of Boston College’s Center for Retirement Research. At the age of 71, she has just released a new book (adding to her impressive collection) which focuses on my favorite subject, retirement. The title of her book is, “Falling Short: The Coming Retirement Crisis and What To Do About It.” In it, she is pushing the idea that it’s just not realistic anymore for people to plan on being able to retire at age 62, and start walking on the beach while holding hands.
Munnell’s argues that most Americans should push the retirement age to 70, so that retirees can fully “max out” what their social security payments will be. She is assuming that due to a lack of savings in America, most Americans are going to have to rely on Social Security – hence the importance of maximizing the amount (with the caveat of working longer).
What’s the unsettling reality of the Social Security system? Without any changes to the current system, the social security trust fund surplus will run to zero, and the government will likely have to reduce payments either across the board or for certain groups.
On top of social security’s issues, Munnell’s other factor leading to the retirement crisis is the slow death of the pension. In 1983 almost two-thirds of workers had some kind of traditional pension plan with a lifetime of income guaranteed. In 2013, though, less than one in four people now have pension plans. Hence, those relying only on 401k savings have increased from 12% to 71% since 1983.
While a pension plan guaranteed retirees a set monthly income based on a percentage of their previous income from the company, now, according to Munnell, the typical household approaching retirement only has around $111,000 in retirement savings which translates into about $400 a month.
I love parsing these statistics – even though some of them might be dire. This might come across as depressing news, but I believe they’re important for all of us to understand so that we can learn how to identify the warning signs and avoid ending up being a statistic.
With all that said, I also believe part of the problem people have with saving for retirement today is that Americans are hearing seemingly impossible and ultimately unattainable retirement benchmarks from Wall Street and the media.
A message of “never enough,” and “work forever” are counterproductive in my opinion for the problem we all face with retirement. That’s why I like to focus on the bare minimum financial benchmarks that everyone can target without feeling like they’ve lost before they’ve even started.
In Munnell’s book, she outlines four main strategies for people to not run out of money in retirement:
1. Work until age 70
2. Save more
3. Pass on less to your heirs
These three strategies are good “common sense” approaches, but let’s look at some of the realities behind them.
If you have zero savings for retirement, then of course you’ll have to work as long as humanly possible and at least until age 70. Based on my personal experience, though, 75% of the people I have worked with over the years are in no way interested in working full time until the age of 70.
Rather than taking Munnell’s approach, I would suggest you aim for the ability to stop working full time at age 62. Then, if you are able, work just enough part time so that you don’t have to tap into your savings. This will allow your savings to continue to grow until age 65 or 66. At that time you can also being taking your social security payments which will also have had time to grow.
For Munnell’s second point on saving more, I think that’s a no brainer. However, I think it’s important that you have a reasonable and attainable goal on the horizon. That way you at least start and stay on your savings journey. Just saying “save more” is too ambiguous of a strategy. In the research for my book I found that happy retirees typically have at least $500,000 saved for retirement. If that’s not realistic for you, though, remember that you should have $240,000 saved to pull $1,000 per month from your portfolio.
As far as leaving less money to heirs, I actually agree. With so many people having virtually zero savings, leaving millions to your kids is a rare luxury. I believe that not being a burden to your children is gift enough.
Here is my update to Munnell’s list:
1. Understand what you need for your monthly budget in retirement above what social security is going to provide; and map out other income streams to “fill the gap”
2. Hit $500,000 in savings for retirement
3. Have a plan to eliminate your mortgage by the time you’re ready to retire
The retirement crisis might be coming, but by reaching the above goals, you won’t be a statistic.
Certified financial planner Wes Moss offers financial and accessible investment advice to Atlanta Bargain Hunter readers.
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