Depression has been hanging heavy over the pre-retirement crowd, as study after study has made it clear that saving enough for a comfortable – wait, make that skimpy – retirement is simply beyond the reach of most people.
Buffeted by declines in the stock market and in home values, forced to make do with less thanks to salary cuts or unemployment, many Americans have given up hope of ever leaving the workplace voluntarily at retirement age.
Now, however, a glimmer of hope can be seen in a study that takes a less-than-conventional approach to examining the issue.
Austin, Texas-based Dimensional Fund Advisors has produced a study, “How Much Should I Save for Retirement?” that takes a look at retirement savings from an angle considerably different from the one-size-fits-all recommendations often made for those trying to put money away for retirement.
The basic premise of retirement planning is to estimate how much an individual will need annually, and usually starts with how much the individual makes (or is projected to make) in her high-earning years close to retirement.
From that figure, the plan deducts projected income from Social Security and any pension money, and what’s left is what has to be replaced.
That may be fine as far as it goes, but it is advice that often operates on the premise that a retiree will be spending 75-80 percent of her final annual salary once she’s stopping working.
So would-be retirees are usually counseled to set aside 20-25 times that amount – enough to be able to withdraw 4 percent a year, plus an inflation factor, to live on and still not run out of money before they die 20 to 25 years later.
It’s a daunting prospect, to be sure, particularly since 80 percent of a final salary of, say, $100,000 a year means they would need to save $80,000, less Social Security and any pension income, multiplied by 25.
Even if Social Security provides $20,000 per year – the average benefit is only $14,760 per year, according to the Social Security Administration – that still leaves $60,000 multiplied by 25, or $1.5 million as a savings target.
With many estimates pegging the average 401(k) balance between $50,000 and $60,000, such a goal seems laughably out of reach. Today’s average pre-retiree is perhaps looking at an underwater mortgage, a 401(k) plan pillaged for the kids’ college and a shaky job – or perhaps no job – so it’s no wonder so many people despair of ever being able to retire.
The annual Employee Benefits Research Institute Retirement Confidence Survey indicates that employees are stuck at the record low confidence level first seen in the 2011 edition of the survey, with 28 percent saying they are not at all confident and 21 percent not too confident that they will have enough money for retirement. None of that is surprising, considering what other studies have found.
But Marlena Lee, a vice president in DFA’s research department, turned several assumptions on their heads.
Her study, she said, focused on “what are the variables, what are the things that will really move the needle, in terms of getting retirees prepared.”
Lee’s study focused on real-world situations. For instance, she said, “we observed that young households don’t save nearly as much as older households. We see people who earn less saving less than people who earn more. Rather than trying to fight that, why not use it, and work on things in line with what we are seeing but are still consistent with getting people to their retirement goals?”
Lee used those realities, including the fact that many expenses from an individual’s working years – such as high taxes – will disappear at retirement, and the potential for a low-saving low earner to boost savings later in her career, when she’s earning more. She also operated on the assumptions that at age 66, most people see an appreciable drop in spending.
When the numbers were crunched, she found that lower-income households in particular did not need to save such a seemingly impossible amount.
Proportionately, much more of their retirement income would come from Social Security, which means less has to be replaced by savings.
The highest earners, she said, would probably need to replace 40 percent of their income from savings; “for the middle 50 percent that number is probably more like the low 30s, and for the lowest group probably in the low 20s.”
In other words, far less than the typical 80 percent figure retirement advisors counsel.
Lee cautioned that “there are caveats about the savings rates we propose. They assume savers start early and are saving consistently – that there’s not a lot of leakage from accounts, that they’re making smart investment decisions, not taking large loans – all of those things could contribute to any kind of gap from the necessary savings we report here.”
Still, the picture from this survey looks considerably brighter, and perhaps can serve as encouragement for pre-retirees as they sock away whatever they can for the day when they can look forward to leisure instead of labor.