Myth Of The One Million Dollar Retirement Plan
the experts who say you'll need a vast sum to ever quit working.
How much you need to retire is really entirely up to you.
Social Security's in trouble. Pensions are
biting the dust.
's savings rate is abominable. And every time you turn around,
some pundit is warning that if you haven't already put aside
some vast sum -- the number changes, but it's always immense --
then you have no hope of ever retiring.
Feel like giving up? Don't.
The truth is, nobody knows exactly how much
you, or anybody else, is going to need for retirement. You may
need a million bucks, or a lot less, or a lot more. The
"right" sum will depend on too many factors,
The studies that purport to show Americans are
doing a lousy job of saving for retirement have to make so many
assumptions about the future that their conclusions must be seen
for what they are: educated guesses. (The same must be said
about all the other studies that purport to show
Americans are doing OK when it comes to saving for their golden
years. Nobody's got a crystal ball.)
That doesn't mean you're off the hook. The more
you save now and the better decisions you make about investing,
the more choices you're likely to have later -- about when to
retire, how you'll live, how much (if anything) you'll leave
You may be pleasantly surprised -- or horribly
depressed. Even if the results are grisly, though, don't let the
doom-and-gloomers talk you into the notion that you'll never
have enough to retire, or that you'll have to settle for some
pinched, strained half-life at the end of your days.
For one thing, money isn't everything, not
before retirement and certainly not after it.
For another, you may have more going for you
than you think. Consider:
Security will probably survive
A lot has been written about the impending
demographic crunch that will cause Social Security to start
running in the red in a few decades. I've even contributed to
some of the hand-wringing about the program's future. But
whatever Congress eventually decides to do, Social Security
itself is unlikely to disappear, and it probably will continue
to provide at least some benefit for most working folks.
Currently, the program replaces 30% to 40% of most people's
income; even if that percentage declines somewhat, it will still
The scenario may be different for high earners.
Currently, the more you make, the less of your income Social
Security is designed to replace. Congress may well opt to cut
benefits even further for the high-bracket crowd in order to
preserve more for lower-paid workers, so you might not want to
count on getting much, if any, benefit.
Now, the younger you are, the more skeptical
you're likely to be about Social Security's future. But there's
a silver lining here. Even the smallest amount you put away for
retirement will have plenty of time to grow, and grow big, so
that you'll be in a great position to provide for yourself if
Social Security doesn't.
Here's an example: a 42-year-old who puts away
$1,000 today can expect that sum to grow to about $7,000 by the
time she hits full retirement age at 67, assuming 8% average
annual returns. A 22-year-old who makes the same investment
would have nearly $32,000 by the same age. So take advantage of
the power of compounding, and start saving now.
probably spend less as you age
Most retirees find their expenses decline once
they quit working for a variety of reasons. Their income tax
bracket may drop. Work-related expenses like commuting shrink,
as do (typically) contributions to retirement funds. And they're
certainly no longer shelling out for payroll taxes, which
consume 7.65% of the typical worker's paycheck.
But other expenses often decline as well.
Bernicke discovered that, far from increasing
at the rate of inflation, Americans' spending actually drops
fairly precipitously as they age, to the point where folks over
75 spend about half the amount middle-aged people do. He
believes this drop is voluntary and tied to aging itself, since
household wealth continues to climb. So your retirement savings
could last longer than you think. Also:
probably won't make it to 100
Much has been made of Americans' increasing
longevity and the risk it poses to retirement funds. The longer
you live, after all, the longer your money has to stretch. But
most of us aren't going to be centenarians, or even come close.
If you have good health and a family history of
long-livers, you might make it. Otherwise, 85 or 90 is
Expectancy Calculator can
help you make your best guess.
probably have some flexibility If you get close to retirement and it looks
like you're falling short, you may be able to work a while
longer or get a part-time job in retirement. If you're a
homeowner, you could tap your equity, either by moving to a
smaller place or taking out a reverse mortgage. If the kids are
gone or the mortgage is paid off in those final working years,
you may be able to boost your retirement kitty considerably
before you cross the finish line.
Or you may discover you're willing to live more
cheaply than you once thought, just to be able to call your time
If you're still feeling tense about retirement,
then channel that feeling into action:
If you don't think you're saving enough, find a way to eke
out a little more. Bump your 401(k) contribution up 1% and
resolve to bump it up again next quarter or next time you
get a raise. Or, if that's not an option, transfer a few
bucks a week into an IRA and put the contributions on
automatic so they're whisked out of your paycheck or bank
account without your having to think about it. Every little
bit really will help. Just keep at it.
Do the best you can, try to roll with the
punches, and realize that nobody -- not you, not me, not the
pundits -- really knows what the future will bring.