Most people believe that they will work until age sixty-five and then, like their parents, retire and live a life of leisure. Like mom and dad, they will spend their autumn years traveling and playing golf.
Mom and dad are living on nothing more than their pension and Social Security. Combined, these benefits provide sufficient income to live comfortably in retirement. Just a few more years and you, too, will be living this idyllic life.
Fat chance. Today, few companies have pension plans like those our parents had. It is now rare for a company to contribute an amount we can live on when we reach retirement age.
Most companies have shifted the responsibility for retirement funding from them to us. Guaranteed benefit pension plans, where the company provides a set retirement income, have been supplanted by 401(k)-type plans. These plans are dependent on employee—not employer—contributions and they will only provide us retirement funding based on the level of our own contribution, and the performance of the investments in the plan we choose.
We are such a mobile workforce today that, even if we do work for a company that provides a traditional pension, few of us will be there long enough to qualify for much of a benefit. We no longer stay at jobs twenty, thirty, or forty years like our parents did.
The government’s original goal of providing a financial safety net to the elderly through Social Security is a fading memory. Social Security benefits have diminished to the point where they are now just a meager income supplement. You can’t live on Social Security. When I do retirement calculations for my clients who are fifty or younger, I don’t include Social Security in the equation.
For many people, the belief that their current retirement funding will be sufficient is often based on hope rather than facts.
Donna was a teacher approaching retirement. She told me that when she retired, she would need only $1,600 a month to live. This amount would cover her basic living expenses and the cost of her greatest desire: traveling to various parts of the country each year to visit her grandchildren. She believed that her teacher’s retirement benefit, Social Security, and some money she had saved would cover all these needs. She wanted to make sure that she would always have $1,600 a month to spend, given her life expectancy and inflation.
She was retiring at the end of the month. The school district was already planning a party for her. But based on my calculations, the most she could spend was $1,200 a month.
By the end of the session, Donna was in tears. It was twenty-four days before her retirement, and she had just discovered that she would not have enough. As she was walking out the door, she murmured, “Maybe I can go back and ask them if I can work part time for awhile.”
It was probably the saddest session I’ve ever had with anyone. She had waited too long to find out the bad news.
Donna’s situation came from the typical and automatic belief that if we work hard for many years, we will be taken care of in retirement. It is based on an old belief that someone is looking out for us, that what we have in our retirement plan and Social Security will be enough.
It probably won’t work that way. Of my hundreds of clients, only a small percentage has adequately saved or are making adequate contributions to their retirement. Only those who have lucrative stock options from their company, an inheritance, or who have managed to accumulate a sizable portfolio, truly have what they need for retirement.
Most people presume they will save this big nest egg so they won’t have to work anymore in retirement. However, they rarely realize how large this nest egg will have to be. A forty-five-year old person who currently has $150,000 in a retirement fund, and who wants to live on the equivalent current spending power of $4,000 a month at age sixty-five, will need a portfolio value at retirement of $2,377,000. He or she will need to save $3,653 a month for the next twenty years to amass this amount. (This example assumes a 4.5% inflation rate, an average rate of return of 7%, and a life expectancy of ninety years.)
What this means is that in all likelihood, most people will need to work past age sixty-five. Age sixty-five was an arbitrary age to begin with. When Social Security was created in 1935, the average life expectancy was sixty-three. Today, we still hold age sixty-five as the standard retirement date, even though the average life expectancy for a sixty-five year old has increased to eighty-three years.