Kiplinger Today


How Much Is Enough?

Before you wax nostalgic for the good old days when you could count on pensions and social security to support you in your golden years, remember that those days were relatively brief -- not so much an era as an aberration.

The whole concept of retirement is fairly recent, an experiment that began with the creation of social security in 1935, observes Ken Dychtwald, a gerontologist and authority on aging in the U.S. With the country facing massive unemployment during the Great Depression, social security was a way of providing older workers with guaranteed income so that they could leave their jobs, freeing up slots for younger workers. "No one considered whether a life without work would be satisfying or sustainable," says Dychtwald. Even when traditional pension plans were at their peak in 1985, fewer than half of Americans working for private companies were covered.

As the leading edge of the baby-boom generation turns 60 this year, "it's time to retire retirement," declares Dychtwald, author of The Power Years: A User's Guide to the Rest of Your Life. And he doesn't think that's necessarily a bad thing: "Like a great dessert, too much leisure can make you sick after a while. Boomers don't want to fade into obscurity. They want to trade success for satisfaction."

Much of that satisfaction will come from continuing to work, either by downshifting to a part-time schedule or cycling periodically between employment and leisure. It's all about remaining connected, vibrant and useful. Not incidentally, it's also about continuing to earn money, now that only 17% of those employed outside government entities can expect to receive traditional pension checks in retirement. And the new retirement is about saving more.


This modern model rests on a solid foundation. Nearly 80% of employees participate in their work-based retirement plans; 401(k) plans alone have more than 42 million active members. All told, more than $13 trillion has been stashed in a variety of public and private retirement plans, more than double the amount invested ten years ago (and despite a brutal bear market).

That's the big picture. How much will you personally need in order to finance your life in retirement? Depending on your age and economic circumstances, your "number" could be 15% -- the percentage of earnings young workers should be socking away. Or 80% -- the amount of preretirement income you should aim to replace when you leave your job. Or $1 million (or more) -- the size of the nest egg needed to generate that income.

Off and running

Allison Dunbar, 32, knows exactly what her number is. She wants to save about $2 million by retirement age, and she's on track to do it. A physical therapist who works in Palm Springs, Cal., Dunbar contributes the maximum amount to her 401(k) plan -- $15,000 this year -- and $4,000 to a Roth IRA. She also saves about $10,000 a year outside her retirement accounts.

How does a single woman, who bought her own house when she was 29, manage to squeeze enough out of her paycheck to fund her long-term goals? Dunbar credits her parents with setting her on the path to saving. They paid for her college education, allowing her to graduate debt-free, and taught her never to carry a credit-card balance.

And she's a creative cost-cutter. In return for a $16,000 increase in salary, she opted out of her employer's health, life and disability insurance plans. Instead, she pays $100 a month for a high-deductible health-insurance policy she purchased on her own. She has a roommate who splits the cost of her $1,000 monthly mortgage payment on a house that has nearly doubled in value over the past three years.

Dunbar calculates that if she continues to save at her current pace and earns 7% a year on her investments, she'll meet her $2-million retirement goal. But she hopes to work at least part-time into her seventies -- just like one of her colleagues at the hospital. "I see people working into their late sixties and seventies and they seem very happy," says Dunbar.

THE NUMBER | Start with the rule of 25

A conservative rule of thumb suggests that if you withdraw only 4% -- or one twenty-fifth -- of your retirement nest egg during the first year and adjust subsequent annual withdrawals to compensate for inflation, you'll never outlive your money. Another approach is to estimate how much you'll need to withdraw from savings during your first year of retirement and multiply that amount by 25 to determine your target number. For a bare-bones budget, you'd need only half as much, or 12.5 times your initial withdrawal. Your personal number is probably somewhere in between.

Age Current Gross Income Projected Gross Income Before Retirement* 85% Retirement Spending Need Estimated Social Securit & yPension Income* Potential Income Gap to Be Funded by Assets Multiply Income Gap by 25 to Arrive at the Number
45 $75,000 $99,521 $84,593 $44,593 $40,000 $1 million

*Assuming current salary increases of 1.5% each year until age 65. *Social secuirty invome of $19,380 based on Social Security Administration data plus a hypothetical pension income of $25,213.
Source: Fidelity Investments.


Market Update