Retirement math: How much you really need

Are people actually running out of cash when they retire?

Fri, Aug 06, 2010
Reuters

Those scary studies keep on coming: The latest one from the Employee Benefit Research Institute drives home the same message as many others: Americans won't have enough money for retirement.

The EBRI study said that nearly half of older baby boomers approaching retirement risk running out of money in their golden years.

But is that really true?

Are people actually running out of cash when they retire?

Are those findings a cause for panic, or can small adjustments around the edges fix the problem?

Like most other retirement studies of the frightening genre, the EBRI report did make a few calculating short cuts that might have made the situation look worse than it is.

For example, EBRI weighed only retirement accounts and home equity, ignoring any other savings that families might have accumulated.

It also assumed that all workers would retire at 65.

I am not picking on EBRI. In general, its methodologies are sound, and more measured than the typical "OMG, it's a retirement disaster!" studies put out by some insurance and investment companies.

But, in general, it isn't the methodology of these studies that is troubling, but the ideas behind them.

They assume, for example, that people will blithely spend their nest eggs at a fixed rate until the day they wake up at 87 or 92 with no money left. And they suggest that retirement is an all-or-nothing proposition: You either can afford to bring your lifestyle into retirement, or you can't.

They don't focus -- or often, even acknowledge -- that retirement is a series of budgetary trade-offs, just like the first 2/3 or 3/4 of life.

So sure, stash away as much as you can -- the more cash you can spend in the last third of life, the better. But instead of panicking and worrying about retirement, take a more logical approach.

The basic math of official retirement planning goes like this: Take your current monthly spending, subtract your expected Social Security payment, and the remainder is what you need to pull out of your retirement fund every month in your first year of retirement.

Multiply that figure by 12, to get the amount you'd need to withdraw in a year.

Multiply that by 25, and that's the size of the nest egg you need to leave work with, to insure that your money never runs out.

Yikes! No wonder everyone's scared.

Here are some mitigating points.

You'll spend more than you think for a while, but not forever.

Retirement planners make much of the first few years of retirement, when you spend on everything from leisure clothes to long-deferred cruises to all those household projects you didn't have time to do when you were working.

But by mid-retirement, many of those expenses disappear.

By the time a person passes 75 years of age, his spending is almost half of what it was for the years between 55 and 64, according to figures from the Bureau of Labor Statistics.

Older retirees spend about 76 percent of what people between 65 and 74 spend. So you can aim to take more out in earlier years and take less out in later years.

You won't want to stay in your house forever.

You may, but not many people do. So at some point in mid or late retirement, you can sell your home, downsize, and add your accumulated equity to the pot of money you have to spend (lowering your expenses along the way.)

Even if you do want to stay in your home forever, new and improved reverse mortgage products will allow you to tap that equity at some point along the road.

You can make little adjustments that will stretch your money further.

You can increase your annual retirement income by about 7 percent for every year that you defer retiring, says research from T. Rowe Price.

Just working a small part-time job and delaying the start of your Social Security benefits for one year will raise the size of your benefit check by about 8 percent for life.

If you keep a little bit more of your portfolio in the stock market over long periods of time (even after you retire), that will help it to last longer.

You can protect yourself against actually running out of money with a few well-chosen products.

A small, low-fee, immediate annuity bought with part of your savings once you are retired will insure that some money comes in every month.

A solid long-term care policy will insure that if you do need extensive care in your later years, you won't have to demolish your family nest egg to get it. It will be protected for your spouse or your kids.

You can live a good retirement life on a budget.

You can do everything from downsize to one car to cut back on restaurant meals.

You can grocery shop with coupons, wait for sales to buy clothes and housewares, and do your own mending, lawn mowing (at least in early retirement) and more -- you know, the kinds of things you already do.

You can take in a roommate, move in with the same kid who moved in with you after college, eat more popcorn and less meat.

You can camp and fish on vacation or couch surf at the homes of all of your old friends, instead of flying to Europe or cruising the Caribbean.

None of those alternatives will ruin your life, or even diminish your fun.

Remember that you have reasonable options that will help your money last far longer than the spreadsheets say it will.