MANAGING YOUR MONEY : PREPARE YOURSELF : The Key to Retirement Planning: Start Early : You’ll probably need tens of thousands of dollars more than you might expect.
Like many couples approaching their proverbial “golden years,” Lawrence and Patricia Leech say they’re looking forward to retirement.
Pat, a 60-year-old former Hughes Aircraft executive secretary, and Larry, a former maintenance supervisor for TWA, both took advantage of early-retirement plans a few years ago. Pat cashed in on her company 401(k) savings plan. Larry, 55, took a job with an aircraft maintenance firm in Mojave and plans to work until he’s 62, when, if all goes according to plan, the Leeches should have no major debt and be able to draw about $36,000 a year from their savings.
“I really feel that by the time my husband retires, we’ll be able to live like we do now,” said Pat Leech.
If so, the Palmdale couple will be something of an oddity. When it comes to retirement, the vast majority of Americans are woefully unprepared, financial planners warn, and are in for some nasty surprises when they quit the workaday world.
With Americans living longer, preparing for retirement is now more important than ever. Yet retirement planning “is probably the major defect in most people’s financial planning,” said Chris H. Carlson, a Deloitte & Touche tax partner. And when most people finally do get around to thinking about retirement, they are likely to suffer a severe case of sticker shock, he added.
Morrie Reiff, an Encino financial planner, recalled one client who came to him at age 56, figuring that he could retire with the $1 million he’d saved and live comfortably, drawing a $75,000 annual income from the savings. Reiff told him that he couldn’t meet his goal without working another five years.
The client was so angry about the news that he refused to pay Reiff’s bill.
But the facts are plain: Most Americans will need about 70% to 80% of their pre-retirement income each year to maintain their current standard of living when they retire. That means a 30-year-old today who wants to draw the inflation-adjusted equivalent of $60,000 a year in retirement would need a nest egg of about $3.5 million when he retires at age 65, Reiff estimates. (By age 65, the 30-year-old would draw $236,765--the equivalent of $60,000 today--in the first year of retirement at age 65, assuming a 4% annual inflation rate.)
That nest egg can include expected Social Security benefits, pension funds, individual retirement accounts and equity in homes, businesses and other assets--all of which can account for a significant chunk of an individual’s retirement needs.
But financial planners warn that relying on these sources alone can leave retirees far short of what they’ll need to maintain their standard of living. The accounting firm KPMG Peat Marwick estimates that most people will have to provide for at least 30% of their retirement income through other investments.
And some financial planners, such as David Bergmann in Culver City, are so uncertain about the future of the Social Security system that they no longer figure Social Security payments into the retirement plans of younger clients as a warning that they can’t count on those payments being available by the time they reach retirement age. To get an estimate of your expected Social Security benefits, call 1 (800) 234-5772 and ask for form SSA-7004, personal earnings and benefit estimate statement.
The most common mistake people make, said Roger Smedley, a Salt Lake City financial planner, is failing to figure inflation into the retirement equation.
That’s no small error. Assuming no inflation, a 37-year-old married worker making $150,000 would need a lump sum of $1.25 million if he retires at age 65 and wants 75% of his current salary, said Smedley. But factor in a 5% annual inflation rate and that figure balloons to $6.9 million.
While there are no hard and fast rules regarding retirement planning, financial planners urge their clients to start saving as early as possible.
“You should be worried about it beginning in your early 30s,” said Carlson. Starting later--even a few years later--can mean huge increases in the monthly savings needed to reach your goal, he warned.
Even after the initial shock of learning how much it will cost to retire, financial planners say, most people still make excuses for not saving. “Twenty-five-year-olds say, ‘We can’t because we’re saving for a house,’ ” said Smedley. “In their 30s, they say, ‘Our kids need shoes and eyeglasses.’ In their 40s, it’s ‘Our teen-agers need designer jeans.’ In their 50s, it’s ‘Our children are in college and weddings aren’t cheap.’ ”
But there are only a couple of alternatives to retirement planning, and for most people they aren’t very attractive. One is to work longer. The other is to accept a much lower standard of living after retirement.
“That’s really all they have to look forward to if they don’t plan,” said Bergmann.
FIGURING WHAT YOU’LL NEED TO RETIRE
Here’s a work sheet to help you determine how much money you will need to set aside to maintain your current lifestyle throughout your retirement years. This planning aid was created in cooperation with the accounting firm of Coopers & Lybrand.
Savings information:
1. Present value of your retirement savings (including IRA, 401(k), Keogh accounts)
2. Multiply Line 1 by Factor A, below. This is the value of your retirement savings if no additional deposits are made
3. Amount of annual deposits to retirement savings accounts
4. Multiply Line 3 by Factor B. This is the value of your deposits at retirement 5. Add Line 2 to Line 4. This is the total value of your savings at retirement
Income information:
6. Desired level of annual retirement income
7. Annual Social Security benefits (see notes below)
8. Expected annual pension benefits
9. Add Line 7 to Line 8. Then subtract this total from Line 6. This is your shortfall in retirement income
10. Multiply Line 9 by Factor C. This is your inflation hedge on shortfall of income
11. Multiply Line 10 by Factor D. This is the lump sum of cash needed to hedge inflation Current savings needed:
12. Subtract Line 5 from Line 11. This is your shortfall in retirement savings
13. Divide Line 12 by Factor B. This is the annual amount of salary you need to deposit to cover the savings shortfall
14. Divide Line 13 by your annual salary. This is the percentage of your salary to save each year
Years to retirement Factor A Factor B Factor C Factor D 10 2.0 14.8 1.6 9.2 15 2.8 26.9 2.1 13.1 20 3.9 43.9 2.7 16.7 25 5.4 67.7 3.4 19.9 30 7.6 101.1 4.3 22.8
Assumptions:
* You will make equal annual deposits to your retirement savings account(s).
* The annual inflation rate will remain constant at 5%.
* Your retirement savings investments will earn 7% annually.
* Your pension will increase at the level of inflation.
* Your earnings will keep pace with the level of inflation.
Notes:
* To find out what your Social Security benefits will be at retirement, call the Social Security Administration at (800) 234-5772.
* Your employer or savings institution can give you the present value of your retirement savings accounts (IRA, 401(k), Keogh, etc.).
* Your employer can give you information on the future value of your pension.
* Present value calculations are very sensitive to rounding errors, so contact a financial planner for reliable figures for your particular situation.
