MAKING SENSE -- July 20, 2012 at 1:23 PM ET
The Biggest Mistake You Need to Stop Making About Retirement
Photo by Kick Images via Getty Images.
The NewsHour has partnered with Next Avenue, a new PBS website that offers information and resources for adults over 50.
Friday's question is another from our baby boom finance friends at PBS's NextAvenue.
What is the biggest mistake the baby boom generation is making regarding retirement planning?
-- Nancy Driscoll
Paul Solman: Not doing any. Or at any rate, not doing enough -- enough retirement planning, that is. Let me use this question to try to beat some sense into you readers about retirement, assuming that you're typical American baby boomers. (I assume no such thing, but the "typicals" are the folks who need the tough love.)
The usual rule-of-thumb is that in retirement, a person will need roughly 80 percent of their current income to live comfortably, "comfortably" meaning something like not having to reduce one's living standard noticeably. Myself, I use a full 100 percent rule-of-thumb since I don't live profligately now and who knows what extra medical expenses I may incur -- elder care, for example.
So if you currently earn $50,000 a year, you presumably need to generate $40,000 to $50,000 annually; $100,000 a year in earnings, and you need to be taking in $80,000 to $100,000, and so on.
Assume that you, the archetypal PBS viewer, have saved $250,000, a royal sum by actual American retiree standards these days. Assume further that you want a risk-free assurance that you won't lose the money while it generates income to pay for your retirement until death. The standard way to do this is give the $250k to a reputable, low-cost money management firm like Vanguard in return for an annual payment until you die -- an annuity. I just went to Vanguard's online annuity calculator to generate the stream of payments such a sum buys.
The older you are, quite reasonably, the higher your payments will be, since you have fewer years left to live and an annuity promises to make payments until you die. It's the equivalent of earning a return on your money while gradually drawing out the principal.
I'm 67. According to the software, on the assumption that I entered the data correctly, and leaving my wife out of the calculation, I would get something like $7,700 a year for every $100,000 I put in. So for 67-year-old PBS viewer (or a viewer of TV trash, for that matter), $250,000 would buy less than $20,000 a year in annuity payments. Add in Social Security of something like $25,000 (pretty much the max for someone at age 67), and our viewer would gross around $45,000 a year, assuming a $250,000 investment.
Now, just to be conservative, let's use the 80 percent rule-of-thumb for income. Since $45,000 is 80 percent of about $56,000, this means that if our hypothetical viewer's income when reaching retirement was more than $56,000, s/he had better have socked away more than $250,000.
Most Americans have not. Although half of American households make more than $50,000 a year, a mere 10 percent of Americans have saved $250,000 or more, according to the latest data I've seen.
Of course, many more boomers now plan to continue working, as I do. But this presupposes continued available employment, as well as the continued ability to perform.
The message, then, is simple: Wake up, Americans, smell the coffee, and then save whatever you can. Most of you are probably going to need it.