Most Soon-to-Be Retirees Don't Have Enough Saved

The December issue of Money magazine lists this interesting stat on the last page:

The median retirement savings for households near retirement (55-64): $120,000

One word: yikes!!!!

Let's look at the math a bit:

• Let's assume a person right in the middle of this age range: age 59 1/2


• We'll give him six more years of work


• So far in 37 years of work he's managed to save $3,243 per year


• We'll add in $20k more in additional savings for the six years of work he has left


• This gives him $140,000 in savings at retirement


• He can withdraw $5,600 each year from this savings if we use the 4% rule (which I know is not worth much in many cases, but we're just trying to get close)

This plus Social Security is going to make for slim pickings when it comes to funding retirement. Is it any wonder that "work longer" seems to be the #1 response to "how are you going to afford retirement"?

It's this sort of low-end, barely-getting-by retirement that I'm trying to avoid. In fact, I want to be on the opposite end of the spectrum -- I want to have enough saved so I can live comfortably at my current standard of living from just the earnings on my net worth and never have to spend any principal. How do I plan to get there? A combination of the following:

• Saving/investing like a fiend


• Looking at creative retirement options


• Investing in rental real estate


• Considering phasing into retirement with an early semi-retirement plan

I'm still a few years away from seeing if this plan has legs to stand on. You'll be among the first to know one way or the other. ;)

Comments

[Liquid]

I'm surprised to find that number so low. Many younger adults think how the boomers are the wealthiest retirees ever seen in any generation. While some studies do show that to be the case, it looks like those retirees don't have it as well as people thought ;) Working longer is often the only choice for people in their late 50s and 60s, but let this be a lesson to everyone else born after them, which is start saving more while you're young :D My plan to reach retirement is similar to yours, save, invest, and prosper :0)

[Gavin]

The part that startled me is "for households"! I mean, I am slightly concerned about how much the wife and I have at age 32: 132K. I would point out to my generation that in addition to saving for our own retirement, it might be wise to also put away some money to help our parents... as daunting as that might be.

My parents are dealing with putting my grandfather in an assisted living facility... it is expensive. He is mostly okay with going but I was shocked to learn how little money he had left for retirement. Everyone always acted like he was very rich and would have no problems, but it turns out he has about 200K left at age 84. He hasn't spent much before now either... I think the issue was what was defined as "rich". 250K sounds impressive at retirement, but a few years in an assisted living facility will drain that completely.

My wife and I are on the heavy save / invest plan ourselves... save up a few million and have no debt or obligations come retirement.

[Biere]

Older generations likely had pensions. Not sure if that was considered in the calculation, but it would make a big difference. Us younger folks will rely more on the 401(k) and IRA.

[Ben]

I was going to make the same comment as Biere. My dad just retired last year from being a school teacher. My mom (nurse) and he did not save really anything for retirement until they reached their mid-40s.

Then they realized my dad had a pension pulling in 50k+/year. That's plenty enough to live on not even counting that my mom still works.

I asked them what they would have done without the pension. They never really thought about it.

The larger concern is for the present generation where many people don't have the luxury of a pension (the nursing pension my mom was a part of phased out in the '90s., so she is left with a 401k - which, if I remember, is quite paltry).

Those that are saving and being diligent may indeed end up having to pay for those less prudent with money. Perhaps this will only be limited to family, but it could mean having to pay for society at large.

[Luis]

@ Gavin "200K left at age 84" is not that bad especially if it does not include a fully paid off home.

At 84, your grandpa can purchase an annuity with his remaining dollars and get $2,200/month for life. The average costs of assisted living today runs about $3,300/month. So just looking at savings, then yes he is at a deficit. But add in the sale of a home, pension(s), and social security and he should be above water and need no financial help.

I'm really curious to know if your parents are dipping into their own pockets to support grandpa. Look at the entire picture and see if that is really necessary.

[JY]

I am 33 and already support 2 parents, my father and MIL. I expect to take on my mother at a later time when her health fails. Knowing all this I am saving as aggressively as I can so I am not a burden to my family when I'm old. MIL and father have not a dime to call their own and my brother and husband and I will be shouldering their retirement (both were "retired" forcibly from their jobs recently) for the rest of their natural lives.

MIL is in the worst shape because she's in total denial about her finances and gives a facade of being much better off than she is - always treats her friends to meals out - buys tons of gifts all the time, etc. This Christmas we are staging an intervention to get her to move out of her house which she cannot afford, and into an apartment. Drastic times call for drastic measures.

[John S @ Frugal Rules]

Wow, that is such a low number for someone to have that's soon to be looking at retirement. On of the many problems that it will cause is that it'll likely force those in this group to work later in life. That is something I don't want by any means.

[Lurker Carl]

There is a problem with depending entirely upon a pension into retirement. Many defined-benefit retirement programs are severely underfunded. The "promised" pension and benefit packages can and do diminish or vanish after you've retired. I would guess it is hard for most 80 year olds to start a new career.

[JeffinwesternWA]

As a former financial planner I saw it ALL teh time! Most people will not simply "defer gratification", drive the old car longer, send the kiddies to community college, shop a bit at Goodwill instead, eat home more, turn on the automatic 1% increase option per year on their 401K plan, not have deluxe cable/phone packages etc. etc., ....it's amazing how many folks I met (hundreds!) that even with 6 digit incomes for an exteneded period had net worths often less than a year or two of income. Sad but spoiled true in these United States...

[Steve]

That's a lot better than I thought. The last census numbers I looked at showed that age group to have a median "net worth" of about that much, but "minus home equity" it was more like $40K. That's basically just a good emergency fund.

[Old Limey]

There's an old German proverb that says, "From shirtsleeves to shirtsleeves in three generations".

1st. generation - Our gallant soldiers that fought and helped win WWII. They didn't spend money frivolously, were savers, understood all about hardship, and lived fairly frugally. Many of them took advantage of the GI bill to get an education or started small businesses when they came home from the war.

2nd. generation - They learned a lot from their parents and the hardships they endured growing up through WWII and were raised with their parent's values.

3rd. generation - Everything was rosy. The mindset was "Having fun", buying a flashy car, not thinking ahead to how they would manage in their old age, buying more home than they needed, going on expensive vacations, having expensive weddings, eating out in expensive restaurants, sending their kids away to expensive schools and colleges, and spending money without thinking about their future and their retirement.

Then the Greatest recession since the Great Depression hit, home values dropped, unemployment increased and suddenly many of them are worried that they won't have enough to see them through their Golden Years. Who is to blame for their predicament?

[Josh Thompson]

Another recent report from Fidelity on combined 401(k) and IRA retirement savings shows that for investors on the verge of retirement -- those between ages 65 and 69 -- the average combined retirement savings is $359,999.

- CBS Money Watch

[getagrip]

I'd like to see more data.

First, compare the savings to the median salary for that age group so we can see the relationship between savings and income. If the median income is on the low side (e.g. $25K) then $120K may not be as bad as it sounds. Alternatively if the income is on the high side (e.g. $75K) then $120 may be worse than we thought.

Then, we may want to consider a number of other things, like those in the lower end (i.e. 55) may just be finishing out helping their kids for college, so now they can jack up their savings for retirement. Or perhaps we compare not just money in retirement but also net worth (e.g. they may have a lot of rental property with high cash flow) or savings outside of retirement.

Additionally compare that, as others have said, to those receiving or slotted to receive some type of pension instead of or in addition to social security (many folks in that age group may have paid parts of their salaries into a pension program rather than Social Security like federal or many state employees hired pre 1984).

These inclusions may make a much larger difference over whether or not $120K in savings is good or bad.

[FMF]

getagrip --

Median income for 55-64 is $55,937 based on this:

http://www.advisorperspectives.com/dshort/updates/Household-Incomes-by-Age-Brackets.php

And even if someone is "only" 55, the fact that they've accumulated so little over so many years is a huge problem no matter how you try to explain it away...

[Apex]

@Old Limey,

I think this description is correct but I think you have the generations wrong. The generation in this article is the one you list as the 2nd generation because its the baby boom generation (55-64 year olds were born from 1948-1957, the first half of the baby boom generation). However I don't think they fit with your description of the 2nd generation. Instead I think they are the 3rd generation. The 1st generation is the Great Depression generation. They were frugal beyond measure due to necessity. Their kids did get their values and learned hard work, and duty, and honor, and valuing what they had and what they worked for. They learned it because its exactly how they were raised. They saw it implemented first hand. They knew nothing else. And they went off and fought a horrible war and stormed the beaches of Normandy and died by the hundreds of thousands in the cause.

They came back and put their values to work being again dutiful, and hard working, and dependable. There is a reason they earned the name "The Greatest Generation". But they also failed to pass their values on to their kids. The reason is because they were determined to change the environment that they raised their kids in from the one they were raised in. That environment formed their values. In the absence of that environment they would have to teach their kids their values very directly and they did not do that.

They saw what their parents went through and how they were raised in the great depression. They determined they would give their kids a better life and they worked themselves half to death to provide it. And who doesn't want their kids to have a better life than someone growing up in the great depression. But they made the mistake of assuming they could do this without passing on the values they had learned from their parents. As a result they provided an environment that taught their kids not sacrifice but comfort, not struggle but ease. Rather than provide a better life and talk about what it takes to get it and sustain it they simply gave it freely, without any cost to their kids or lessons about how it was provided or how their kids might provide it one day for themselves. Or if they did attempt to teach their kids these values, they clearly failed. Likely though they assumed their kids saw what it took to provide it. But most kids don't see that. They just see what was provided.

They may not have realized that they were training their kids to have much different values from their own. Kids do not just naturally acquire the values of their parents. They get the values that they have thrust upon them by their parents and society unless of course they are specifically taught and trained to develop a different set of values from those they are surrounded with (not an easy task by any measure anyway). The greatest generation through their increased prosperity and lack of values training, sowed the seeds of their kids financial demise and illiteracy.

Multiple generations now, gen X, gen Y, millenials, are repeating the values of the baby boom generation and compounding them, and financial illiteracy is ubiquitous.

The baby boom generation as a collective whole does not share many values that are in harmony with the values of the "greatest generation" their parents. It's a good lesson for all of us I think to keep in mind the challenge of providing a better life for our kids while teaching them not to be spoiled by it, not to expect it, and how much hard work it takes to achieve it and sustain it. If you don't teach them that and simply provide it to them, why would they not think it is just theirs for the taking.

As a funny example, my kids regularly ask me why I have to go to work and can't stay home and play with them. They have heard me tell them so many times now that when I tell them why do you think? They roll their eyes and say "because if you don't go to work we will have to live in a tent." I hope my values training is more comprehensive than that but I do know that they won't just pick up my values by default or by just watching me work.

[jim]

There aren't that many people aged 55-64 with pensions really. Only about 30% of current retirees have pensions. 20% of the total worker population is still covered by a pension. People aged 55-64 will be between 20-30% probably. More likely to have pensions than younger workers and thus >20% but less likely than current retires and thus <30%.

Lurker carl said: "The "promised" pension and benefit packages can and do diminish or vanish after you've retired."

Shouldnt' happen legally in general. Employers are not allowed to simply cut your pension after you retire. Theres federal law regulating that. If a company goes bankrupt then generally the pension is backed by the PBGC.

[jim]

Josh quoted : " those between ages 65 and 69 -- the average combined retirement savings is $359,999."

The $120k number in the article is the median and that $360k number is an average. Average will be higher than median due to wealthier folks dragging up the average. Median is more useful to consider the 'typical' retiree.

[Mark]

So, I'm only assuming that you've now gone gung ho into this whole real estate thing is because you're disappointed with your returns on equities and interest rates are absymal and are not likely ever to return to satisfactory levels in our lifetimes. What about equities, though? You were strongly pushing those before...is it that the 10%/year often-quoted hasn't panned out in the last 20 years?

[jim]

Agree with Apex. Not to criticize the baby boomers in general but they are the hippy generation, not the greatest generation. Course my 'X' generation is known as being lazy slackers. Generational sterotypes at just stereotypes.

[FMF]

Mark --

I'm not converting my entire portfolio to RE. In fact, I expect property holdings to be only 30% of my net worth at most. I am still in equities (index funds) and put in the max to my 401k each year (which is partially maxed.)

I am investing in real estate because of income, return, diversification, and an inflation hedge as detailed here:

http://www.freemoneyfinance.com/2012/08/my-road-to-becoming-a-landlord.html

I am investing in real estate because I am moving into the last "income" stage as detailed here:

http://www.freemoneyfinance.com/2012/12/income-to-wealth-to-income.html

And it's all part of my "moving to retirement plan" as detailed here:

http://www.freemoneyfinance.com/2011/04/my-retirement-plan-updated.html

And here:

http://www.freemoneyfinance.com/2012/10/retirement-guideposts.html

So I don't know if by "gung ho" that you're implying that I'm moving back and forth without direction (it's sometimes hard to tell with the written word what the tone is), but if it it, rest-assured, I have a plan that's reasonable and hopefully effective for my life stage and retirement goals.

[Christa]

How scary! I hope Baby Boomers can work longer and begin to save more. It would be terrible for them and for he economy if that figure doesn't budge.

[Old Limey]

Apex:
Thanks for filling in some of the gaps in my post, I really enjoyed reading your synopsis of the generations and how they change from grandfather, to father, then son, and grandson.

I'm 78 and got to know my grandfathers very well. They both served in WW1, one was gassed but overcame it well. The other one came through the war quite well and was then sent over to quell a rebellion in the Irish free state and was a member of a hated regiment called the Black & Tans. All three of my uncles were in WWII, one fought at the battle of El Alamein under General Montgomery and was in a regiment called the Desert Rats that was victorious over Rommel. Another uncle was in a famous Scottish regiment called the Black Watch and wore a kilt of course. One of my wife's uncles was in the Siege of Tobruk in Libya. As a child I remember all of the "Yanks" that were in our town on the South Coast enjoying some R&R, they were very good to us kids and were very generous with their candy (which was severely rationed for us). My father was a fireman and was kept busy putting out fires from the German bombing. We had a steel table shelter in our basement and my parents used to carry me down to it when the Air Raid siren sounded and we stayed there until the All Clear siren sounded.

[JM]

Pretty sure my parents, who fall into this age range, have less than this because they've wasted so much money over the years, despite my dad's high salary. I've had serious talks with them about it, but they never change their ways. Worried sick about their future, but I'm not going to enable them by supporting them unless they are in truly dire need.

[Luis]

@ JM

It's good that you have an idea of your parent's savings, but why not take a step further during the holidays and find out all the financials? It is important to look at everything and not make haste judgements. For example, have you asked for an annual Social Security statement showing their average salaries for up to 35 years of service? With your dad's high salary he could be bringing in $4k or more per month on Social Security alone. Is the home paid off? Are there inheritances coming his way? Medicare? Are they planning to work right up until retirement age? It's good to come from concern, but another to worry more than meets the eye.

[Dick Belson]

Luis:

If one retired in 2013 at 66 the maximum Social Security benefit is $2,533. No one gets $4k from Social Security.

[spivey]

@JY - is there any chance at all that we could hear how this financial intervention goes? I am incredibly curious.

[Luis]

Dick, you're correct on the 4k for just the dad, but the wife gets at least half that amount even as a homemaker. For example, dad waits until full retirement age, and collects $3200. Add in spousal benefits and they are at $4800.

[Bethany]

I don't think anyone has yet figured out a truly accurate metric for looking at how Americans are doing in preparing for retirement. Most surveys look at one specific vehicle only(normally 401(k)s), which just don't tell the story well anymore, if it ever did.

I couldn't find where Money pulled this number from, but I'm guessing self-reporting. Given that, as blogs like this prove on a fairly regular basis, most Americans are not particularly financially savvy, the actual median amount could be quite a bit better- or worse.

[Apex]

@Luis,

In order to get a SS check of $3200 he would have to wait until he was age 70 to draw to get his maximum draw. Not only is waiting until 70 rare, but waiting until 66 is rare. Most people I know of who have limited retirement savings started drawing at 62. Which is the worst thing someone with minimal other funds can do.

Does anyone here know of anyone who has ever waited to age 70 to get the maximum SS draw? I am sure there are people who do it but I have never heard of anyone doing it myself. My dad still works in farming at age 76 but he started drawing at age 65.

[Luis]

Waiting until 70 is not so difficult especially for a person who knows their life expectancy to easily reach 90-100. So it isn't impossible and there are ways to make waiting until 70 easier.

For example, let's assume that JM's parents both work and the father makes a high salary (150k+) than the wife (50k+). They both retire at 66 and he waits to take the maximum draw for his Social Security until 70. The wife begins to draw spousal benefits at age 62 and decides to save the monthly amount, let's say $950, until they retire at 66. Not counting interest accrued, they can easily expect to spend their savings of $950 per month starting at age 66 until they reach 70. To pad their income, they do two things a) husband draws spousal benefits from his wife who averaged 50k/year at age 66, we'll say $550 and b) they take 15% ($1500)of their retirement nest egg (let's assume it reached 120k at age 66). $950+$550+$1500 is $3000/month from 66 to 70.

When the father reaches 70 he draws full retirement of $3200 and wife continues drawing spousal benefits of $950 for a total of $4150/month from 70 onwards.

[Apex]

@Luis,

No doubt. I am just saying I have never heard of anyone that I know doing it, have you? You have to remember most people are financially illiterate. So they need to be educated. Have you ever tried to tell someone they are a financial moron and they need to listen to a 40 year old punk tell them how to survive their golden years? Cause that is how they are going to see it when you try to tell them that it is a mistake to draw early. I have many elderly people in my family. I have heard them talk and watched their actions. They think idiots don't draw early. Leaving money on the table. Be dead before you ever end up money ahead.

Also you said who knows their life expectancy to easily reach 90-100. Who is that? Most people don't expect to live that long. Again, I listen to these people talk. they expect to be dead before they would end up money ahead. Or at least they fear it. They are more scared of being dead early and not having drawn as much as they could out of SS than they are of living too long and not having any money to live on. It's irrational but it's how they think.

I have tried to talk at least one person down from this way of thinking and hinted at it to another. So I am not just speculating here. I was not remotely successful.

[Squirrelers]

FMF - your plan makes sense of course, and clearly you're actually taking action to have a truly comfortable retirement vs. one where lifestyle needs to be "downsized".

That's what's so crazy about what many people do - they live it up, live beyond their means, and then feel the bitter disappointment in struggling later in life to life a more spartan life.

I'm actually surprised that the number is that high, even though its clearly insufficient to support retirement.

[Old Limey]

We retired when I was 58 and my wife was 59. Our home and condo were both paid off and we continued to travel extensively up until I was 76 and my wife was 77. In 2010 after 3 surgeries and impaired lung functions from COPD my wife's ability to undertake strenous vacations and to endure long international flights without adversely impacting her health were such that we decided to become homebodies. Thus one very large expense to being retired eventually ceases for most people.

We are still enjoying our retirement immensely but our travelling is now just within the San Francisco Bay Area. Our biggest expense, by far, is the income tax due on the minimum required distributions from our IRAs.

One thing that I would STRONGLY urge future retirees to possess in retirement is "Great Health Insurance". The best, in my opinion, is having a "Medicare Advantage" plan. Ours is through United Healthcare and costs us $305/month through my ex employer's retirement plan, in addition to the Medicare payments that are taken out of our SS checks (which are now means tested).

The cost of many healthcare services, procedures, and equipment are sky high so be prepared to pay some huge bills unless you have superb coverage. If you retire prior to going on Medicare all I can say is you had better not have any serious health problems, particularly those that require surgeries and hospital care. So, unless you and your spouse are in excellent health hang on to your jobs until you are eligible for Medicare. Looking back I can see that I was at risk between 58 and 65 but fortunately neither of us needed expensive procedures during that period and the cost of healthcare has risen greatly since we retired.

Another shocking statistic I read today in my newspaper is that the cost of sending your child to college has jumped 500% over the last 30 years. My 52 year old daughter, lived at home and received her BS degree at San Jose State University and it cost her so little that she paid all of her own tuition and books out of her part time jobs working at a car wash and doing housekeeping. I gave her an interest free loan of $500 to buy my old Honda Civic which she dutifully paid off in installments (By the way, after divorcing her attorney husband, her net worth is now $3M).