Probably the most talked about article this weekend was the New York Times' retirement op-ed. Teresa Ghilarducci writes,
To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. If you have an income-producing partner and a paid-off house, you need less. This number is startling in light of the stone-cold fact that most people aged 50 to 64 have nothing or next to nothing in retirement accounts and thus will rely solely on Social Security.
Retirement planning is sorely needed in this house. Because we spent so much time in grad school, we didn't get started on 401K plans until much later than anyone else. We need to save more. This article increased my stress levels quite a bit.
Apt. 11d 
I looked at the AARP calculator that the article links to to get the $2 million figure and it assumes you need 85% of your current spending after you retire. That seems high. About 95% of financial advice (and 99% of diet and exercise advice) seems to be given for the same reason people tell stories about escaped prisoners, lonely roads, and hooks found on door handles.
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“Your Money or Your Life” is a must-read to jumpstart your planning and to hopefully start alleviating your worry.
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I’ve been paying into retirement plans since I started fulltime work at 28. Even so, I don’t think I’ll be able to retire at 68 since my spouse has been chronically underemployed since we moved here for my job and we have Autistic Youngest who’s going to be a dependent for a long time. . . .
Thank goodness I like my job!
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I maybe like her idea for an involuntary retirement system separate from social security. Even professional fund managers are crap at realizing yields greater than those for indices so it’s ridiculous to think the average person with even less knowledge will be able to do it successfully. I don’t expect it to happen, though.
I’m all about people saving more for retirement but I think the $2 million figure is hogwash. Most people do not need that much money saved to retire comfortably because most people do not continue to spend at the same level in their 70’s and 80’s as they did in their 30’s, 40’s and 50’s. So, yes, people need to save but they also need to learn to live more frugally. A drop in disposable income in retirement doesn’t seem like as big of a deal to people who have little to no debt and are already accustomed to frugality.
(Health care is a different story, but that could bankrupt even people with a large sum of money set aside for retirement. I also don’t think that an individual approach to addressing a systemic problem like the rising cost of health care for seniors is an appropriate solution.)
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Beware of people saying you need $x million to retire, ESPECIALLY when they have a vested interest in selling you products to supposedly meet that goal. In retirement, these are the things that I’m paying for now that will no longer exist: child care; college savings; house payment; retirement savings; social security. Yes, housing expenses, including property taxes, will continue to exist and increase, but just imagine your monthly budget without the above listed expenses.
The best approach is not a multiple of your income or a percent of current spending. You should estimate your living expenses in retirement and fund toward that.
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Yes, but . . .
Your health care expenses do increase, and they aren’t tax deductible.
Are you planning in spending every day at the public library? Unless you have a very low threshold–like, free–for entertainment, those costs go up. You will want to travel, especially if there are grandkids. There’s a bunch of stuff that you probably do for yourself now that often gets harder, like landscaping. Yes, we all know the nonagenarian who’s still weeding the truck garden, but that’s actually really rare.
If your house is old enough to be paid off, it’s old enough to start needing things like new roofs and boilers.
You also have to remember that taxes come out of those retirement savings. Your 401(k) is taxed at ordinary income rates, which means, if you are taking out $100,000 a year, that you are going to be paying at least 25% of it to the government.
There’s also downside risk to think about. Even bond markets go down sometimes.What happens to you if your “safe” 4% return turns into a “safe” 1% return (this is about what has happened to current retirees). If you are already planning on a retirement in which you spend thirty years puttering around the house and spend almost no extra money, you’re pretty much hosed here.
The reason retirement experts offer such high numbers is not that they personally benefit, though of course, some do. But even non-beneficiary experts end up making basically the same recommendations, because it takes an extraordinary amount of money to sustain an adult for thirty years without working.
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And yet, most retirees do not have $2 mil saved and they are still able to have retirements that don’t drop them into poverty. People who have nothing saved or who have a lot of debt will often end up in dire straits but if a couple retires with a paid off house and $300k they’ll probably be ok when their SSA benefits are added to that. They won’t be living it up, of course, but they’ll probably be able to meet their needs.
If there’s a sea change in American behavior and savings rates skyrocket, great, but otherwise I think estimates like the $2 mil one are like the recommendation to exercise an hour a day: they seem so impossible to most people that instead of doing what they can they don’t do anything at all.
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Your health care expenses do increase…
Your out of pocket health care expenses do not usually increase after age 65. Even before Part D, that was very rare. Obviously, long term care is a different problem if that hits, but 95% of the people couldn’t possibly save enough to provide for 30 years of long term skilled nursing care even if they saved 25% of their income from age 16 on. You have to either insure that or figure that Medicaid will have to get your back on that one.
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they seem so impossible to most people that instead of doing what they can they don’t do anything at all.
Exactly.
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I thought that article was great, until it got to the part about how paid money managers were somehow going to make more of that investment than you would. As scantee points out, paid money managers don’t beat the indices either, and are prone to wishful thinking, too. The assumption that some professional manager was going to be different from the “guy” seemed far-fetched to me.
I think mandatory savings might be a good thing, but I think that there are plenty of salaries at which the mandatory savings would make the salary unlivable (and not by giving up the extras). I agree that suggesting people save 2M is like suggesting they exercise an hour a day (perceived as impossible in both cases). But, the author of this article also recognized that problem; one solution is to make the savings mandatory (tough to do with the exercise, except, potentially, for children, where we can make them do the exercise in school).
My goal is to save 20X our annual income for retirement because I do expect our expenses to be similar because I want to enjoy activities in retirement.
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It’s like the instructions on the shampoo, “Lather, rinse, repeat.” When I get busy, it takes too much time to do the “repeat,” so I just get my hair wet and call it done.
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Since we did graduate school late, we’ve only been saving for the past 10 years (and we’re into our 50s now). But since we’ve been ruthlessly saving, I can’t imagine that we’d need 100% of that income. On the other hand, my husband got laid off in April, and while consulting seems to be working for him, it’s sure messing with my sense of any working projections. That and two college-aged kids, even with good merit money, not sure how the 20-30,000 for college is going to work without draining savings. It will be interesting.
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Hi, I think I should weigh in here. I am a huge fan of both Teresa and her plan and know quite a bit about it. One of the reason paid money managers do better than you (and when it comes to large amounts of money,they do) is an economy of scale. They are able to negotiate significantly lower fees than you individually, or even your company via a 401(k) — if your company negotiates at all, that is. This makes an ENORMOUS difference in how much money you will be able to save.
Second, the $2 million number is quite realistic for all the reasons Megan articulated. It’s also not achievable by many under our current system. How this will end I cannot say, but it won’t be good.
Finally, I should say the retirees that were mentioned who are getting by with $300,000 should not be compared to us Gen X types. Many have pensions, which you cannot outlive. Housing was significantly cheaper for them too, and, if they owned a home in the 1970s, they ultimately benefitted enormously from inflation.
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Wow I picked this article out as key too.
I used to work for a magazine/site geared towards retirees. This was back in the golden age of defined-benefit pensions – ones where X% of your salary was guaranteed.
Even with that kind of safety net, a really common story was that one of the spouses would get sick, or one of the kids, or someone would retire early to be a caregiver for _their_ parents, and that would suck down family resources.
Ironically this company didn’t have any pension fund or even a group savings plan for its staff.
I think Gen X has special challenges. “Pension” to us means the old-school defined benefit sort, but what we’re signed up for is something a lot less certain. Add that to the likelihood that we’re going to want the latest iPhones and iPads and to be out doing stuff while health permits I think we’re going to want more in retirement.
My grandmother puttered around and bingo was her big excitement; she had the same record player and records she’d had for years; she never had a cell phone bill. My boomer parents are totally into traveling and can afford it in part because they inherited from my sit-at-home grandparents and in part due to a gold-plated academic pension.
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she never had a cell phone bill.
Costs are going up, but let’s not go crazy. Ever pay a phone bill before AT&T went into little pieces? My family spends less (in current dollars) on two cell phones (one with a data plan) and than my grandmother spent on loca and long distance in 1984. Adjusting for inflation would probably get you the landline and the DSL service for less than she spent.
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Well telecomm is a bit different Canada, but I do remember those days. I once had a $300 phone bill because my first fiance and I were breaking up.
That said, my grandparents wouldn’t make LD calls. They wrote letters. 🙂
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A few friends of mine like to joke around that when we turn 70, we’re starting up the Old Lady Commune. I think the plan is to keep the men around in an outbuilding out back or something.
I actually really love communes, as I mentioned in a previous post, because it really is possible to save a lot of money by pooling resources. Too bad that other people are so annoying.
My parents have a very comfortable retirement (river boat cruises in France and jazz concerts in Manhattan), because they are very thrifty in ways that I’m not (coupons, ugly shoes) and because dad has a gold plated academic retirement plan that doesn’t exist anymore.
The truth is that we could be much thriftier and save more. There is room in there for improvement. We spend too much on food and restaurants. With some better planning, we could shrink that number. I’m dreaming about redoing the dated kitchen. I could just suck it up and live with it. Our technology expenditures are insane, but that’s not going to change. I would rather have a new computer, than a new car.
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One of the reason paid money managers do better than you (and when it comes to large amounts of money,they do) is an economy of scale. They are able to negotiate significantly lower fees than you individually, or even your company via a 401(k) — if your company negotiates at all, that is. This makes an ENORMOUS difference in how much money you will be able to save.
My understanding is that the best performing funds are those that are passively managed, track an index and therefore have low fees. There’s not a special skill there as far as I know, it’s just “put your money here, hold on to it for a long time, and then in a few decades you’ll have more money.”
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Anyway, I’m 34 and I plan to semi-retire in the next 5 to 7 years and I won’t have anything near 2 million saved. My plan is to pay off my house and save around $300k in non-retirement investments. At that point, I figure my spouse and I can each work around 20 hours a week and bring in enough to save some and cover our needs and many of our (simple) wants.
It’s going to happen, oh it will, don’t even try to tell me it’s not possible.
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MH,
Agreed on the 85%. If you should be debt-free and have a paid-off house and self-sufficient kids by that point, 85% is a lot. Of course, who knows what taxes and out-of-pocket medical or the cost of nice nursing homes will be by then. But $2 million is a good number to shoot for in any case for people with comfortable incomes.
I don’t think we can count on out-of-pocket health expenses not rising. My grandpa got a repeat (!) hip replacement on Medicare at age 87 (he wore out the first one). I’m not sure the powers that be are going to want to spring for that for me when it’s my turn, so it would be wise to take into account what the cost of a privately-done hip replacement will be in 2062. (Grandpa’s 90 now and still farming, by the way.)
hush,
YMOYL goes further in the you-can-eat-tree-bark-and-love-it direction than I like. Of course, maybe I would have liked it better if it were the first personal finance book that I had read. (I read the revised version–it’s possible the original is better.) Elizabeth Warren has a pretty good personal finance book (with her famous 50-30-20 spending plan) and I like Dave Ramsey’s Total Money Makeover (although that’s not specifically a retirement-planning book).
scantee,
About the mandatory retirement on top of Social Security–did you notice how very vague she was about the details?
“My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities. This is a sensible way to get people to prepare for the future.”
That’s essentially Social Security II (except for the guaranteed return–we have no legal right to SS). I also think that the annuity model (guaranteed low returns) could be a disaster in case of high inflation, as Megan suggests. It sounds safe, but it’s actually very dangerous, whereas the stock market sounds (and is) dangerous, but is actually safer than annuities in case of inflation. I agree with scantee and bj on the merits of “professional managers.”
I agree with the author that the 401(k) system is very vulnerable to the all-too-human urge to prematurely break the piggy bank.
My husband didn’t open a retirement account until his early 30s and our contributions were really negligible. It felt late, but looking on the bright side, we missed out on the tech bubble. I really like his current employer’s plan, which while not idiot-proof, makes good decisions the default. The employer automatically puts in the equivalent of 10% of salary every year and the employee contribution is on top of that. It’s been adding up lickety-split, even during the current unpleasantness. We were also debt-free by my husband’s mid-30s (we haven’t bought a house yet).
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As far as the gold-plated pensions go, some of them go bust and you get a max of $54,000 from the government. This is far, far below the payment from a $2 million annuity even if you peg it to you and a spouse’s life. And very few defined-benefit pension plans paid anything like 85% of your salary. Fifty percent was more more common. My point is that articles like this comparing 401k to a past that hardly existed for anybody.
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“My point is that articles like this comparing 401k to a past that hardly existed for anybody.”
Yep. I keep hearing about the pensions of yesteryear, but I don’t think I know anybody who ever actually got one (my 90-year-old grandpa had an IRA from his saw mill job, not a pension). And as MH points out, when a pension fund goes bust (which they do with awful regularity), it can be almost a total loss.
Pensions are another thing that look safe, right up until they aren’t.
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I’m not sure the powers that be are going to want to spring for that for me when it’s my turn, so it would be wise to take into account what the cost of a privately-done hip replacement will be in 2062.
It’s really hard for me to see a future world in which Medicare doesn’t exist and in which the economy is good enough that the assets of small investors are both safe and growing above inflation.
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My grandfather had one of those mystical pensions of yesteryear and, yeah, it was pretty great. Between that and social security benefits he and my grandma never had to touch their savings even though he retired at 58 and lived to be 92. Those plans weren’t common but they existed and people continue to incorrectly believe they were the standard rather than the exception.
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The reason that they are recommending such large nuts are:
1) Earlier retirees got the benefit of stock and real estate appreciation that is not expected to repeat
2) Earlier retirees were much likelier to have defined benefit pensions
3) The people this advice is targeted to are affluent.
Social security actually replaces quite a lot of your income if you make $25,000 a year (and there are often subsidized housing, etc opportunities).
It replaces about a third of your income if you make $100,000. As you make more, the replacement rate gets less favorable.
There is a reason that reverse mortgages became popular.
Retirees were already having problems–I’ve met a lot of them over years of reporting. But over the last few years, the market declined dramatically, and shows no indication of delivering solid year over year growth. Bonds are similarly returning nothing. So the amount that financial planners recommend you withdraw annually has been slashed in half. If you were previously taking out 4% you take out 2%–because the principal is not growing. Now there are a lot of young retirees who are completely freaking out, because they did not anticipate having to live on $2600 a month plus a little bit in retirement; they expected their savings would leave them well padded. Basically, retirement planners used to recommend that you take 4% out a year, but they’ve now cut that to 2%.
So let’s look at the retirement lifestyle of a fairly typical couple with a paid-off house and $300,000 in the bank. Say one person made $30,000 and the other made $45,000, of which they diverted 25% to various taxes, 8% to retirement savings, and 5% to other miscellaneous items like health insurance. (this is high, but I want to make the best case). That left them about $4,000 a month. House payment was $1300 but deductions give it a net cost of about $1100.
Now they retire. Social security benefits are about $1700 a month for the pair. They get $500 from their savings–it used to be $1000, which was decent if not spectacular, but in light of recent market activity, that’s been revised. Unfortunately, that $500 a month pushes them over the SS means test, which means that half their social security benefits are taxed–not a lot, but some–and the $500 itself is subject to tax. Overall, their net monthly income is $2000 or less.
There are still health insurance premiums–Part D, Medigap. They are not that cheap. They are also no longer tax deductible. And speaking as someone who’s mother is on Medicare, there are still quite hefty charges. Especially if they end up in the donut hole.
All in all, you’ve got a couple with what is a quite decent income in many parts of the country living on maybe $1500-1800 post tax and health care–but not post food, post utilities, post repairs, post-someone-to-take-care-of-the-yard. But wait, what if one of them dies or goes into the nursing home? It’s usually Dad. Now Mom is trying to live on either her social security benefits (if she worked) or half of his. Even if Medicaid doesn’t drain your retirement savings, that’s pretty lean.
It’s even worse if they get divorced; you have two adults trying to live on a pretty meager stash.
So things that you observed people doing ten or twenty years ago just aren’t a good guide. There are reasons to think that returns will be lower for a long while–too much capital (all those people trying to save for retirement!) chasing too few solid investment opportunities. My 401(k) from the 1990s has essentially the same value that it did in 2000, and I am not unusual.
It can be done, to be sure. But it’s pretty miserable. $1500 a month for two people does not make room for much in the way of enjoyment. There’s a reason that old people watch so much television.
And if you had a higher income, like say two people making $120,000 to $150,000 together? The replacement math is even grimmer–more of your benefits are taxed, at a higher rate, the social security replacement rate is lower, and you live in a higher cost area. Unless you sell out and move–sounds appealing in theory, less appealing when you realize that your friends and family are all elsewhere–you’ll run through that $300,000 in a few years.
The reason retirement experts are screaming is that people have extremely unrealistic views of how they will want to live in retirement–and those views are shaded by the fact that they don’t want to save now.
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My 401(k) from the 1990s has essentially the same value that it did in 2000, and I am not unusual.
Mine too. And that’s the one that I paid taxes on to turn it into a Roth.
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They get $500 from their savings
Is this assuming they won’t touch their principal? If it is, why would you assume that they won’t touch their principal? I would guess that they saved the $300k so that they could use the principal to fund their retirement.
It’s not a fabulous situation by any means but it’s doable. And, once again, I think people should be encouraged to save as much as they can. Since most people don’t do that- and, for most, don’t do anything even close to that-then explaining to them what life will be like with a more likely amount of savings has a greater benefit than hair-on-fire proclamations of, “YOU CAN ONLY RETIRE IF YOU HAVE $2 MILLION DOLLARS!!1!”
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With the market being so evil, hubby has taken a more aggressive approach to our mortgage repayment plan. BTW, hubby has terrible tales about the market right now.
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So move to all cash is what you’re saying?
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…hubby has taken a more aggressive approach to our mortgage repayment plan.
Me too. We don’t pay extra, but we have goatse as the background for our checks.
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No, it’s not assuming that they won’t touch their principle. In most cases, their principle (if it’s safe) is now getting less than 2%, especially if you factor in inflation. Real returns on many treasuries are now negative.
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Laura said:
“My parents have a very comfortable retirement (river boat cruises in France and jazz concerts in Manhattan), because they are very thrifty in ways that I’m not (coupons, ugly shoes) and because dad has a gold plated academic retirement plan that doesn’t exist anymore.”
I think that’s a common formula for the currently comfortably retired–splurges in a few areas, frugality everywhere else.
My grandpa retired around 70 from his mill job, but kept ranching. There’s also very occasional timber income. Up until recently, they had a vegetable garden every year. They always pay cash for cars. Their house never had a mortgage on it, ever, but took years to build. The little cottage on the property they lived in while building the house has been yielding a small rental income for the past 50 odd years. They have Social Security, the small farm income, the small rental income, the occasional timber windfall (those tend to run to five figures, but trees grow slowly), plus income from my grandpa’s mid-five digit IRA and a few financial odds and ends. Like Laura’s parents, they love their trips and the occasional fancy outing and they send a $100 check for grandchild birthdays (and there are a lot of grandchildren!), but I can’t recall them ever going out to a restaurant in town for no particular reason. And they usually split a restaurant entree these days. Aside from a lot of FOX News, their leisure activities at home include such things as prepping the house for repainting. It was a very big deal when they finally got a riding mower a few years back to help cope with their huge lawn.
On the one hand, it is very heartening to see that it is possible to live such a long and productive life without huge savings, but on the other hand, planning to live that way on a similar income would mean that there are some unpleasant things to be faced up to:
1. no “help”
2. 95% home cooking
3. no “retail therapy”
4. work as long as possible at your day job and then keep working in retirement
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On the one hand, it is very heartening to see that it is possible to live such a long and productive life without huge savings, but on the other hand, planning to live that way on a similar income would mean that there are some unpleasant things to be faced up to:
Yeah, whenever I encounter members of the professional class moping about how they won’t be able to retire, I can only think, “Retire from what?”
Invariably I know that these people take at least two vacations a year, endlessly renovate their homes, eat out constantly, have expensive cars (the average price of new cars purchased in the US now exceeds $30k!), buy themselves and their kids new clothes, electronics, etc. without thinking twice.
They had their retirement… they just chose to spread it out over their working life. So of course that working life is gonna have to be a lot longer.
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Not only do a lot of near-retirees not have substantial savings, we are also living in an era when many elderly people have considerable debt.
http://hereandnow.wbur.org/2012/05/10/elderly-student-loan
“New research from the Federal Reserve Bank of New York shows that more than six million Americans over 50-years-old are still paying off student loans.
“Some people have debt because they went back to school at a later age. Others got stuck with payments after co-signing a loan for a child or grandchild.”
http://www.post-gazette.com/stories/news/us/mortgage-problems-surge-for-elderly-645437/
“As he hauled his belongings by pickup truck from this Atlanta suburb and moved into his daughter’s basement, Mr. Johnson became one of the 1 1/2 million Americans over age 50 who lost their houses to foreclosure between 2007 and 2011. Of those, the highest foreclosure rate was for homeowners over 75.”
Mr. Johnson bought the house in 1963 and it was foreclosed on in 2011.
http://www.forbes.com/sites/janetnovack/2010/10/12/credit-card-debt-blamed-for-surge-in-elder-bankruptcy/
Simply not being deeply indebted would be a major improvement for a lot of today’s elderly.
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MH said:
“It’s really hard for me to see a future world in which Medicare doesn’t exist and in which the economy is good enough that the assets of small investors are both safe and growing above inflation.”
Let’s imagine that something like Medicare does exist in 2062, but that they figure that they have better things to do with their money than repeat hip replacements for 87-year-old ladies. (And were it not my hip in question, I might agree that it was kind of a crazy thing to do.)
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As usual, do not depend on Megan McArdle for accurate financial advice.
1. At $1700/month SS and $500 interest income, the SS benefits are NOT going to be taxable. And drawing down from the savings, if they aren’t in a traditional IRA, will not increase their income that’s subject to tax, or the baseline to determine if SS is taxable.
2. Your medicare/medigap premiums are deductible, subject to the 7.5% floor that exists today. (And you know that the donut hole is eliminated under the ACA, right?) At $30,000 per year, anything over $2250 in medical expenses, including premiums, will be deductible.
Agree that most people need to save “more,” or “a lot” to have a realistic relaxed retirement. But let’s base it on accurate assumptions, and not all the NE lifestyle.
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