Saturday, June 6, 2015

How Much Money Do You Need in Retirement?

     A survey done in April by the Employee Benefits Research Institute, a Washington D.C.-based nonpartisan, nonprofit research organization, concluded that people are feeling better about retirement than they were just a few years ago -- although they're still not as confident as we were back in our day, the halcyon days of the 1990s.

     Today, almost 60 percent of American workers feel relatively comfortable that they will be able to finance their retirement, compared to fewer than half during the Great Recession -- but less than the 70 percent in the mid-1990s who figured they had enough resources to support a comfortable lifestyle after they left work.

     What's interesting is that people who are already retired have greater confidence in their financial future than people who are still working. Over 80 percent of current retirees say they have enough money to pay for their basic expenses. And 78 percent of retirees feel confident they can afford their medical expenses, compared to only 56 percent of people still working who think they will be able to afford medical care after they retire.

     Perhaps this reflects a difference in views toward Medicare. We expect that Medicare will be there for us. But apparently our children are not so sure. Only 43 percent of today's workers think that Medicare "will continue to provide benefits of at least equal value to benefits received today."

     One thing that strikes me about the report is that 59 percent of retirees believe they have enough money to pay for long-term care, such as a nursing home or at-home care, should they need it. I don't know how this can be true, considering assisted living can cost up to $10,000 a month, and a nursing home even more than that.

     Last year (at B's encouragement) I purchased a long-term-care insurance policy, and I'm still not particularly confident I can afford to survive in an assisted living facility for very long. I guess if you go broke, they put you on Medicaid and (as happened with the father of a friend of mine) send you down to the end of the hall where the rooms are smaller and the services not quite as good.

     So how much money do most people think they need to have saved up by the time they retire, so they can live comfortably? About a quarter of those surveyed say you only need something less than $250,000. On the other end of the scale, 20 percent figure you should be sitting on at least $1 million to live a comfortable lifestyle after you leave work.

     Of course, a lot of that depends on whether or not you have the benefit of a pension plan. Obviously, if you're receiving 80 percent or more of your salary from a defined-benefit plan, you don't need to have much in the bank. But if you have no pension at all, you'd better have something substantial to supplement that Social Security check.

     Finally, what percent of your pre-retirement income will you need to live comfortably in retirement? Most people say it's somewhere between 50 and 70 percent. But a significant number of people think you'll be perfectly okay with less than half of what you were making while you were working.

     I know in my case, my expenses went way down when my kids finished college, moved out and began careers of their own. No more diapers to buy; no more sports equipment; no more college tuition. I'm also saving money on medical insurance, now that I'm on Medicare, and at some point in the not-too-distant future Bridge and I will be moving to a smaller house with lower taxes, lower heating bills, and (hopefully!) no lawn maintenance.

     So just suppose, someone in their 50s comes up to you and asks, "How much money do I need to retire?" What would you tell them?


25 comments:

schmidleysscribblins.com said...

How much money does one need? So many facors to consider as you point out. I don't worry about his very much. Am I ignorant? Don't know, don't worry.

rosaria williams said...

I found that medical expenses increased way over my anticipation. So, what we should be doing, as a country, is encourage the government to provide single-payer programs that include birth to death coverage, eliminating the one expense that is hard to manage for most folks. In addition, social security benefits should increase, and we should pay for them with our first job, and continuously, until we retire.

Anonymous said...

I have two private retirement benefits that add up to 18.5% of what I was making at retirement. Social Security gives me 21.9%. Thus I am getting 40.4% of what I was making in retirement. Can I live on that? Absolutely! But, unlike some others, my medical expenses have been minimal. Am I glad that I put aside money during my working years? You betcha! At retirement, I had investments (including IRAs and 401K) that were a bit over 10 times my annual salary.

Thus, I would advise anyone that they can probably afford to retire when their investments equal 10 times what they are making - if their retirement income from defined benefit retirement plans plus social security replace 40% of that annual salary. They won't need that much if they plan to downsize their lifestyle; but, they may need more if they foresee medical issues.
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Kathy @ SMART Living 365.com said...

Hi Tom! Thank you for another interesting post and the link to the research. I find it fascinating that workers expectations about their retirement appear to be rather optimistic in spite of the fact that most savings appear to be quite limited. Those who have a pension plan seemed quite pleased but did it say anywhere what percentage of the public actually has a pension? I tend to think that is becoming less and less as time goes by. I do agree that in many cases we can get by on less in retirement than we may have previously guessed just because so much of what people spend is to entertain and medicate them from jobs they really don't like that much! Lots to think about. ~Kathy

Janis said...

I am concerned that near-retirees are way underestimating their financial needs in retirement. I think many have the fantasy that they will be able to cut their expenses but we, as Americans, aren't very good at figuring out what we "need" vs. what we "want." I'm also amazed that some people still think that "one million dollars" is a huge amount of money. Inflation over the years has taken care of that!

My husband and I are comfortably retired... for now. Medical expenses are the big unknown. We are very healthy now and work hard at staying that way. But, I've been blind-sided before with a medical diagnosis so I know it can happen again.

Anonymous said...

Some people don’t seem to worry about retirement because they are going to inherit large sums of money. I have seen some do well in retirement when a loved one’s life insurance policy provided their nest egg. Because Congress refuses to make any decisions other than “spend, spend, spend”, it is hard to believe that social security and medicare aren’t going to take terrible hits in the future. I suspect that interest rates will remain near zero for decades because Uncle Sam can’t afford the interest payments on the national debt. Regardless of what a “financial adviser” will tell you about waiting until 70 to take your benefit, once you have had a serious illness such as cancer…and looking at how stupid Congress is about fixing anything…there is a lot of incentive to take social security at age 62. In any case, the answer to how much do you have to have in investments is probably at least $1,000,000 because at 3 percent, that million will only throw off $30,000. Best advice to 20-30 year-olds is start saving!

DJan said...

Long-term care is the only possible wrinkle in my retirement plan, since I don't have much to worry about. Nobody in my immediate family has lived long enough to need assisted living, and I'm not sure I would want to be in one of those places anyway. I've got my annuities payout and Social Security, which takes care of the day-to-day expenses quite well. But I have to say I'm glad I'm already retired and not still working in a much less comfortable environment.

Grant at RetireCrazyGood said...

As a retired Financial Advisor and with over 40 years of working in the financial services industry, I've seen up close what happens when you have enough and not nearly enough to retire in the traditional way. I've also seen countless examples where the amount saved had little to do with whether the individual or couple felt good about what they planned to do for the rest of their lives. That's why my wife and I chose a non-traditional retirement; instead, we decided to "retire crazy good" and base our life decisions on what matters most, making contributions into the lives of others before the clock runs out. Those so-called "retirement calculators" are not always accurate, especially if you plan a portfolio of activities to bring in additional income while you also focus on lowering your expenses. For example, today my expense footprint is less than a tenth of what it was three years ago... that wipes out the calculator's advice! From my view, getting a clear view of your lifelong dream is more important. With that what matters most serving as a beacon on the horizon, you can then pursue a lifestyle along with adjusted inflows and outflows to make it happen. My advice today: simply live your dream.

gigihawaii said...

We have savings, SS benefits, and rental income. It's enough for hubby and me. No worries.

Tom Sightings said...

At least $1 million? Well, the NY Times today had an article "Millionaires Who Are Frugal When They Don't Have to Be" which refers to "single-digit millionaires" as people who are comfortable but not really rich -- they don't even have enough money to meet the $10 million threshold of having to pay the estate tax!

We think of $1 million as a lot of money; but sometimes our perceptions lag. After all, $1 million is worth only $164,000 in 1970 dollars -- still a lot of money but not exactly enough to make you wealthy or even truly financially independent -- not if, as Anon. says, it would produce just $30,000 a year in income. So, TRSS ... Thank Roosevelt for Social Security!

Olga Hebert said...

I find that my retirement income, like my work life income, turns out to be just "Not quite enough!" Oh. well, I have a place to live (or two) and enough food to eat and a little worry about money keeps me on mt toes.

Dr. Kathy McCoy said...

Thanks for a thought-provoking post, Tom! There is so much uncertainty, even five years into retirement, about how much is enough. My husband and I are trying to live on Social Security plus a tiny pension I earned in my last five years of work (it amounts to about 10% of my previous income at that venue.) We also have 401K savings that have been disappearing way too fast as a result of medical expenses, house expenses (we thought buying a brand new home would spare us major expenses for a long time -- wrong! In the past year, we've had to replace the a/c system, the water heater and the fridge in our six year old house!) and taxes! We moved from California to Arizona to save money, but it's still a bit of a struggle.

My advice to a younger person looking toward retirement would be to diversify savings -- go for a Roth Ira or just plain, non-tax deductible savings. All of our savings are in 401K's and trigger an avalanche of taxes every time we take money out -- being taxed as regular income and also triggering taxation of our Social Security benefits. That's something we should have anticipated -- but didn't.

Dr. Kathy McCoy said...

P.S. Re long term care insurance: we don't have any but I worry a lot about it. We've explored either insurance or a continuing care community.

I have a friend whose story is instructive. She and her husband have long-term care insurance. He has Alzheimer's and their insurance would cover care in assisted living or in a nursing home, but it doesn't provide much coverage for home care. The husband gets frantic at the thought of leaving home for a care facility and his wife feels too guilty to insist. So they sold their home and moved into a rental, using the proceeds to pay for the live-in caregiver they need but that their insurance won't cover. She tries not to think about what will happen to her, the healthy, younger spouse, after he is gone -- his care rapidly eating up whatever resources they have.

A neighbor couple -- both in their late seventies and in poor health -- have run out of savings and are trying to live totally on Social Security that amounts to less than $2,000 a month combined. They look a reverse mortgage on their home only a few months after moving in to fund some travel earlier in retirement and have no more home equity to tap. It's very sobering to watch and drove us to seek the services of a fee-only financial counselor who has given us some good advice to avoid such a scenario in our future.

Kitty said...

How much you need in retirement is entirely personal to your situation. It really depends on how much you see yourself spending in retirement. In our case (DH retired 5 years ago and I went to a very part-time work from home schedule), we spend about 1/3 of what we spent/saved when we were working full-time (and we still have 2 kids in college). Once the kids are fully gone I expect our spending will be about 25% of what it used to be. We don't need anywhere close to half or more of what we used to earn.

As far as long-term care, the problem is that for many people the available long term care policies don't really meet the actual needs. Most current policies only cover care for a few years. Like many, we could afford to cover the care for a few years. The real fear is long-term care for many years. What I really want is a policy with a 3 year deductible and which covers everything beyond 3 years. But, that isn't available to my knowledge. What is available are policies that will cover the time period that I can cover, but won't cover the super long term stay that I couldn't cover.

Anonymous said...

My mil lived to almost 87 she did not have much a maximum on her first husbands social security and ssi from her disabled working son who is now 60 years old..She passed at Christmas 2000 we paid for the funeral no one did one damn thing, she had 9 kids 2 were already passed from this life, my hubs the oldest she thought of him as the bank of America at times, I held firm knowing we were not, she tried to get money for her two worthless drug and alcohol sons but we never gave her much only paid for some bills once or twice, she lived like she was going to live forever, some Mom I say, she never cooked or cleaned and her husband my hubs dad never supported her or his many kids he lived to 74 and died of liver cancer for all his alcohol stuff and running around with women and smoking since he was 11 years old both lived a long long time..I say why worry about anything, you are not getting out of this world alive..

Anonymous said...

My aunt my mom's only sibling is nearly 100 she bought into a lovely place she was married 2 times and divorced no children and extremely frugal and thrifty owned her business, sold properties in san diego California she got in and after world war 2, she made a killing..She is doing well will be 100 pretty soon in 2 years, she seems happy, outlived my Grandmother and my mother by about 30 to 45 years, she watched all the crap from the depression and let me know to save and save some more, a wedding gift was two months on our mortgage which I promptly paid off and paid on the equity and paid our home off in 14 years by making extra payments all the time. We don't live lavishly nor do we live like we are homeless people, we are okay, just don't expect to live a long long life, type 2 diabetes, my Mom passed when she was in her early 40's due to cancer which has afflicted my family..One should live like they will not be living a long life with all the cancers, etc. that is plaguing the society in general..

Gabbygeezer said...

I've been retired for 21 years. We live comfortably on about half the income my salary once generated. The keys were to have no mortgage at retirement time and to be careful about expenditures all the time. We are able to buy everything we really need, and also enjoy some travel, lots of dining out, remodeling our home, and the ability to help our son as he establishes a business.

I don't think there is a standard formula that can tell everyone how much they need to be able to retire comfortably. It is a matter of life style choices, and those can vary considerably for each individual.

Jane said...

I would encourage young people to save regularly. At the start, the habit of saving is more important than the amount.

I live a middle class life and even though the calculators say I have plenty, I am concerned about end of life care. There are no viable alternatives other than moving to Oregon

Baby Boomers Fitness said...

We have about 11-12 years to go before retirement. I'm finishing up 2 years of tracking our expenses, (which is eye opening). But it really allows me to understand what our expenses will be like in retirement.

Lancaster, PA nursing homes said...

I would like to encourage all people to save on regularly basis, then at the time of retirement you can get big savings.

Lancaster, PA retirement homes said...

Yes Saving while working is very essential at the end when retirement time comes at that time this saving is very helpful.

Linda Myers said...

We live on five pensions (including SS) of varying amounts, plus about $1,000 a month withdrawn from savings and investments. We are fine unless one of us lives for ten years in a nursing home. I am determined that will not happen.

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