The 401(k) generation is beginning to retire, and it isn’t a pretty sight.
The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases.
The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.
One really doesn’t need “to maintain its standard of living in retirement.”
My retirement income is about 60% of what I was drawing when I retired. And it is only as much as it is because for the last ten years I worked, I was putting aside about 30% of my income in 401K, company stock, and CDs. One has to realistically figure out what one needs to
survive on, and how much investment it will take to produce the difference between
that and one’s SS check. Some of those
Boomers also had a company pension or IRA going, before the companies swapped to the 401K strategy. That needs to be counted in as well. Once one has calculated the target number, then one has the choice of living on 100% 0f their current income and eating catfood after retirement, or reducing their current standard of living in order to save the required amount. Think of it as “evening out” ones income over the rest of ones life.
Many financial institutions have programs online that help you through the calculations. I know that Fidelity does.
It isn’t rocket science, but it is painful to
contemplate for those who are used to instant gratification of their desires. Time for them to learn a little self-denial.
This analysis treats “maintains its standard of living” as 89% of pre-retirement income, which seems ludicrous. With sensible decisions, at that point houses and student loans should be paid-off, other debt managed or also paid-off, and the day-in/day-out expenses of being employed (commute, wardrobe, eating out) all go away. I understand the recent turmoils have hit nest-eggs, and some of those at fault walk with millions, but what I can’t understand is how these foreseeable needs sneak up on people.
A few years ago Matthew Price of the Church Pension Fund did a presentation on the financial situation of clergy and surviving spouses in retirement and found that the most critical issue in terms of perceived well-being was not the dollar amount of the pension or social security check (though of course that was important), but rather whether the retiree or surviving spouse owned a home without mortgage at the time of retirement.
Bruce Robison