Gone are the days when a company would reward a retiree’s long years of service with a gold watch and monthly pension. Today, old-fashioned defined benefit pension plans have been replaced with 401(k)s and Individual Retirement Accounts (IRAs). These accounts require you—not your employer—to determine how much to save, as well as how to invest and manage those savings. They also require you to assume all the investment risks and be fully responsible for both retirement accumulations (savings) and distributions (monthly retirement checks).
These developments raise several questions about retirement that you need to ask yourself, including: What does retirement mean to me? What does it look like to me?
What does it cost? How much do I need to accumulate to achieve the lifestyle I want?
Unfortunately, most people don’t know how to think about retirement. And, they have an even hazier picture of how much retirement could cost them.
What Does the New Retirement Look Like?
As a financial adviser for the past quarter century, I have had an intimate view of my clients’ goals, dreams and finances. This is what they tell me about the new retirement:
I would rather wear out than rust out.
I want to phase out.
I want to start a new second or third career.
I want to start a new business.
I want to enjoy a full life, and remain a contributing member of society.
I want to leave a legacy for my family or others.
I want to run my own charitable family foundation.
In other words, I find that most of today’s retirees need an identity and a purpose in life—something to get them out of bed in the morning. So it’s important to have a vision of your retirement and to plan ahead.
How Much is Enough to Fund the New Retirement?
It’s been my experience that in order to retire at age 65 and live a similar lifestyle, most middle-income folks will have to accumulate at least $1 million in savings, in today’s non-inflated dollars, by the time they reach age 55. To get there, a 35-year-old will have to save approximately $2,500 per month, assuming a 6% return on their portfolio. They will have to continue to save at this rate and perhaps at a higher rate to age 65, if they expect to fund 35 years (to age 100) of retirement, with just Social Security and after-tax income from their portfolio. Saving at this level in a tax deferred-account will get you about $2.5 million of retirement savings at age 65.
What will this hefty saving buy you in retirement? For every $50,000 of current expenses, a 4% annual inflation rate for 30 years (age 35 to 65) will require you to pay about $166,000 to buy the same level of goods and services at age 65, and about $650,000 at age 100. And don’t forget about taxes: Of that $2.5 million you saved for retirement, approximately one-third ($825,000) belongs to Uncle Sam and New York State.
Of course, a retiree could work part-time or start a profitable business to reduce the burden on his portfolio. However, by their late 80s and early 90s, retirees usually are not working even part-time, and have the added expense of hired help who look after them. In other words, the amount you will need to save—and be responsible and accountable for—will seem like another mortgage payment. Say goodbye to yesterday’s simple company retirement plans, and welcome the reality of the new retirement.