Retirement Planning

It seems to me…

You can retire from a job, but don’t ever retire from making extremely meaningful contributions in life.” ~ Stephen Covey.

In 1900, the average person in the U.S. had a life expectancy of 47 years; today, that same person can anticipate living for an average of 79 years. Anyone retiring at the age of 65 needs to have sufficient savings on which to live for at least 20 years and, for many people, considerably longer. Unfortunately, the majority of Americans do not have sufficient savings to last even a fraction of that length of time.

In 1967, one-third of those over 65 were classified as impoverished. In 2012, that figure had declined to only 9 percent – a percentage unfortunately now expected to increase: it is estimated that 48 percent of those now reaching retirement will be unable to afford even basic expenses[i][ii]. Where in the past most employees qualified for retirement income under their employer’s pension plan, that benefit has now all but been eliminated.

Current savings difficulties actually began as a result of tax code changes in 1970 primarily intended to benefit high-income corporate executives by allowing them to set aside a percentage of their salary on a tax-deferred basis. The Reagan Administration extended that benefit to all employees as a 401(K) plan intended to supplement rather than replace traditional pension plans. Companies however began eliminating traditional pension plans. Today, only 10 percent of employees will receive retirement income from company-sponsored plans.

Studies found that those 55 or older who had regularly contributed to their 401(K) for the previous ten years were likely to have about $269,500 in savings which is about the amount required just to cover only their anticipated medical costs but not any additional expenses. The average American has only $42,000 in savings and 55 percent of current workers do not have any employment-based savings. AARP says 75 percent of Americans between 55 and 64 have less than $30,000 in savings.

Those in their fifties or early sixties facing the reality of inadequate retirement savings frequently state they haven’t any alternative other than to keep working but that too is unrealistic. Age discrimination might be illegal but it is sufficiently difficult for anyone viewed as “older” to find new employment following job loss; for anyone not self-employed, it essentially is impossible to find new employment after 65. Most companies prefer younger employees though there are exceptions in addition to “Greeters” at Wal-Mart. Colleges and universities frequently employ lecturers to teach basic level classes but that requires experience and an advanced degree. For many others, other than self-employment, a paid position might be unavailable.

Only 10 percent of Americans understands the level of savings needed to retire and live in a fashion similar to their pre-retirement standard and only 14 percent are confident they’ll have enough to live on when they retire. The harsh reality for many people is that once they have the time to do all they had postponed until retirement, it then is unaffordable.

The amount of investment necessary for retirement is different for everyone though the general guideline is to plan for living expenses of about 80 percent of expenses prior to retirement adjusted for yearly inflation. But this recommendation actually only permits a very modest standard of living. For most people, expenses actually increase following retirement. For those assisting with volunteer agencies such as the Red Cross, few expenses for local responses are reimbursed. There is more time for travel. More time for projects around the home. More time at home increases utility expenses. More time with grandchildren. More time for hobbies. And as we age, more medical expenses.

There are relatively easy methods of calculating both how much of an investment is necessary to maintain a standard of living, the Multiply by 25 Rule, and for how much can be withdrawn from an investment, the 4 Percent Rule[iii]. The Multiply by 25 Rule estimates how much you’ll need in your retirement portfolio by multiplying your desired annual income by 25. If you want to withdraw $40,000 per year from your retirement portfolio, you need $1 million dollars in your retirement portfolio ($40,000 × 25 equals $1 million).

The 4 Percent Rule estimates how much you will be able to withdraw from your portfolio after you’re retired. It also guides how much you can withdraw annually once you’re retired. As the name implies, this rule of thumb says you should withdraw no more 4 percent of your retirement portfolio in any year ($1,000,000 × 4 percent equals $40,000). A more conservative estimate would be to withdraw no more than 3 percent in any year.

Another consideration, especially if you’re several decades away from retirement, is to adjust the projected required investment for inflation. A quick estimate is:

  • If you’re 10 years from retirement, multiply by 1.48.
  • If you’re 15 years from retirement, multiply by 1.8.
  • If you’re 20 years from retirement, multiply by 2.19.
  • If you’re 25 years from retirement, multiply by 2.67.

There are numerous Web-based calculators available that will indicate how much someone needs to invest a month to reach their investment goal but the younger someone begins investing for retirement, the less it is necessary to set aside each month.

Those who do not invest for retirement use numerous rationalizations to justify their actions such as not having enough money or when young that there’s still plenty of time. Some people feel paying off debt is more important or that it’s too late to make a difference. Many people are scared of the stock market or believe investing is too complicated. Others never get around to it if their employer does not offer a retirement plan. If started sufficiently early and not impoverished, everyone can afford retirement. There isn’t any excuse.

When Social Security was launched 70 years ago, it was meant to be a supplement for retirees, not a full pension. At a time when an increasing number of Americans are experiencing difficulties with even basic living expenses, social welfare programs are under attack by conservatives. It is difficult to understand their concerted opposition to the Social Security Program as it constitutes 50 percent or more of the retirement income for 66 percent of Americans age 65 and older, more than a third of retirees (35 percent) receives 90 percent or more of their income as a monthly payment from the Social Security Administration, and 22 percent who receive Social Security benefits are totally dependent on that check according to the Social Security Administration.

There actually isn’t any legal requirement to participate in the Social Security program unless working and earning income and not everyone is covered by the program. Contrary to what many people believe, members of Congress and the self-employed also are required to pay into Social Security. Among those not covered are state and local workers in school districts who have their own retirement and disability programs, members of a religion that do not believe in insurance (such as the Amish and Christian Science), or a religion whose members have taken a vow of poverty. These exclusions frequently penalize those that occasionally work in those areas not covered and consequently either do not qualify or receive reduced benefits under the program.

There isn’t any way to mandate saving for retirement. Everyone needs to assume responsibility for adequate preparation for that time in their lives when they have the freedom to enjoy the benefits from all those years of working. Unfortunately, many people find the concept of delayed gratification difficult to grasp when considering their immediate desires.

That’s what I think, what about you?

 

[i] Fidelity® Unveils New Retirement Preparedness Measure: More Than Half of Americans at Risk of Not Covering Essential Expenses in Retirement, http://www.fidelity.com/inside-fidelity/individual-investing/fidelity-unveils-new-retirement-preparedness-measure, 4 Dec 2013.

[ii] Copeland, Craig, PhD. Labor-Force Participation Rates of the Population Ages 55 and Older, 2013, Employee Benefit Research Institute (EBRI), http://www.ebri.org/pdf/notespdf/EBRI_Notes_04_Apr-14_LbrPart.pdf.

[iii] Pant,Paula. Budgeting and Personal Finance, about.com, http://budgeting.about.com/od/financial_rules/a/Do-Not-Confuse-These-Two-Rules-Of-Thumb.htm.

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About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
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