| Friday, May 16, 2008 |
| The incredible shrinking nest egg |
USAToday is kicking off my weekend on a down note with the article: The incredible shrinking nest egg If they're right, Americans need to face a sobering fact: They're not likely to have as much money for retirement as they'd projected. Which means that many of us will have to save more, expect less and work longer than we'd planned.
Investors who rely on historical returns for the past 50 years will "probably overestimate what we're likely to see in the future," says Chris Jones, chief investment officer for Financial Engines, a retirement-plan consultant.
"As much as we'd like to say history is a good guide to what the future holds, it's simply not true."
Consider a 45-year-old with $100,000 in savings and income of $50,000 this year.
If that worker contributed 8% of income to his 401(k) plan for 20 years, received an annual raise of 4% and earned an average return of 10%, he'd retire at 65 with $878,862.
By contrast, if his average investment return were only 8%, he'd end up with much less — about $652,000. And if he earned an average return of only 6%, he'd retire with just $486,310. Great, lower my expectations, figure out how to save more, and work forever - just the kind of future that gives me nightmares... |
| posted by Boston Gal @ 12:09 PM *
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| 5 Comments: |
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"Great, lower my expectations, figure out how to save more, and work forever - just the kind of future that gives me nightmares..."
Which is better, to have $2 million when the average nest egg is $3 million, or to have $1 million when the average nest egg is $500,000?
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Since I am pretty much at the sample numbers (45.5 yrs and $120k), this certianly hits home with me. I think the point that should come out of this story is the importance of saving as much as possible, as early as possible, which can overcome poorer returns (at least somewhat).
At 44 I decided to put my retirement savings in overdrive until I hit 50 and then re-evaluate my situation. My goal is to have $250k in retirement & IRA by then, and given a 6% return I should be able to just do it. No one said saving was easy.
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I'm a 30 something person who has about 180k in the 401k, no debt after paying off my modest home last year, and 200k in cash. This article was a punch in the stomach, but as I get up I feel more determined than ever to continue with saving. I will eventually put most of my cash in Vanguard mutual funds, with a large foreign exposure, and the rest is for emergency. If the worst case scenario in the article plays out, I will be able to live with a modicum of respect in retirement. I am hoping that my current profession will allow me to work well into my 80s on a part time basis to supplement my retirement income. I met a 'over-educated' middle-aged unemployed man who cannot get a job as a health care administrator because there are too few openings, and he is over qualified for 'lesser' jobs. To me, that is a scenario worst than USAToday's article.
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All you 30 and 40-somethings take a deep breath and relax...you all won't be dumpster diving in your old age, at least if you've saved some money. Here's a few reasons why:
1. Look at your grandparents and see how they made it in a world where hardly anyone put money into stocks and many people were lucky to have a roof over their head during and following the Great Depression. My grandparents retired on mostly Social Security (yes, it'll still be around in some form for us!) a modest pension and a paid-off house and they traveled, eat out, and lived a comfortable existence the rest of their lives. If you don't have many expenses, especially a house payment, it really is possible to live on half of what you make now. If you don't NEED to pay $1,000 a month to the bank for your mortgage, its like making $1,300 a month before taxes. You all are planning on paying off your homes, right? Right?
2. I'm old enough to remember the "sky is falling" comments of the late 1970s and early 1980s. Remember Stagflation? Long gas lines? The death of equities? People putting their money into gold, diamonds and their stamp collections because stocks were dead? Ok, you get my point. Now is the time to keep investing in a diversified portfolio. Get stocks while they are cheap!
3. Don't be afraid to explore alternate ways of living i.e. roommates, downsizing to manufactured housing i.e. mobile homes, moving to cheaper areas of the country, etc. I live on the West (Left) Coast where housing prices are probably similar to what BostonGal is paying. Moving to Arizona or Utah after I retire would allow me to live the same lifestyle on 30 percent less money than it does now.
Also remember, the older you are, the less money you spend. When you are 90, chances are, you'll be happy watching the world go by rather than skydiving.
Here's a calculator that takes that into account:
http://www.reverse-mortgage-information.org/retirement-calculator.php
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Don't be so sure that you will be better off than your grandparents! Let's see...very unlikely to have a company pension, social security in peril, the federal reserve bent on inflating away the debt by printing money...and who lives in a house (or has a traditional mortgage) and pays off their house!?!?!
Guess what folks, "retirement" will be 100% self-funded...better get saving!
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"Great, lower my expectations, figure out how to save more, and work forever - just the kind of future that gives me nightmares..."
Which is better, to have $2 million when the average nest egg is $3 million, or to have $1 million when the average nest egg is $500,000?