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How much do we need to retire?

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Each individual’s situation is unique. Yet, almost everyone invariably underestimates how much money they’ll need to survive retirement. Have you ever tried to answer this question for yourself? What’s your number?

According to Kiplinger’s Retirement Savings Calculator[1] if you are 40 years old, plan to work till 70, and live until at least 90, you’ll need a nest egg of almost $5M. That’s in order to maintain the same lifestyle level. Note if you are earning $100,000 per year now, Kiplinger says you’ll need $243,000 per year in future dollars to afford the same lifestyle. If you are just starting out with retirement savings you’ll need to be saving around $1,706 each month for the next 30 years. CNN Money’s retirement calculator begins with a default nest egg of $100k for 35 year olds, and saving rate of 15% of income.

The data also shows a dramatic disparity in between expectations of spending in retirement, and actual spending. Just a couple of years after retirement age the average account balance sinks by around 50%.

How much have we saved for retirement?

In early 2015 Fidelity reported the average 401k balance had hit a new record high of $91,800. This rises even higher for the typical working household nearing retirement which has both a 401k and an IRA; at an average of $111,000. Yet, Boston College’s Center for Retirement Research says that will barely yield $400 a month in income[2]. Vanguard reported the median 401k balance for those earning over $100k per year had soared to $125,519 in 2015[3]. However, Forbes reports that independent experts put the average 401k balance for 65 year olds closer to just $25k[4]. The downward trend in the stock market from mid-2015 through early 2016 could well have shrunk many of these balances too.

The most important number in retirement?

What’s the most important number? Is it the size of your nest egg? Your net worth? Your returns? Or your passive income?

MIT and Harvard Professor, and Nobel Prize winner Robert C. Merton says “the risk is retirement income uncertainty, not portfolio value,” making the most important number “the amount of sustainable income an employee can expect to receive in retirement.[5]

Merton warns we are heading for a 401(k) crisis[6]. This is in part due to the dramatic trend away from defined benefit plans to defined contribution plans, but also due to the fact that 401ks and their reporting statements have individuals focusing on the wrong goals. If everything is geared toward the size of the portfolio, it causes many to make the wrong choices for what is most critical – income. Merton isn’t against a well balanced portfolio which includes stocks, but has also been an advocate for deferred annuities, and real estate which he says can be used as a pension, as property owners tap equity in retirement.

Pensions & Investments echoes this sentiment saying that “Clearly, the risk and return variables that now drive investment decisions are not being measured in units that correspond to savers’ retirement goals and their likelihood of meeting them. Thus, it cannot be said that savers’ funds are being well managed.[7]

By taking control of their own investments (as you can with a self-directed IRA) individuals can better diversify their holdings and optimize them for both wealth growth and maximizing passive income. This applies equally for those starting out, and those already on the verge of retirement.


[1] http://www.kiplinger.com/tool/retirement/T047-S001-retirement-savings-calculator-how-much-money-do-i/

[2] https://time.com/nextadvisor/banking/savings/

[3] https://www.fool.com/investing/general/2015/11/02/the-average-american-has-this-much-saved-in-a-401k.aspx

[4] https://www.forbes.com/sites/edwardsiedle/2013/03/20/the-greatest-retirement-crisis-in-american-history/#47c0d2181b88

[5] https://www.marketwatch.com/story/401-k-s-face-crisis-says-nobelist-merton-1403632848/

[6] https://time.com/nextadvisor/

[7] https://www.pionline.com/article/20141124/PRINT/311249997/everyone-is-focusing-on-the-wrong-goal-in-retirement-planning


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