RetirementIt seems every week there's a new study on how thoroughly unprepared Americans are for retirement. Combined with unnerving stock-market volatility, this discouraging research could lead you to give up on retirement planning all together.

Undoubtedly, the recent market decline is wreaking havoc on 401(k) balances; housing values have tanked in certain markets; and costs, particularly health care, are rising dramatically. But the truth is, calculating "retirement adequacy" turns out to be a highly idiosyncratic business. Individual savers should ignore the noise and redouble their focus on personal savings and spending plans.

"The notion of 'adequate' retirement savings is fraught with conceptual difficulties," says Alan Love, an assistant economics professor at Williams College who has studied retirement. "In particular, it's not always clear how one should think about adequacy of wealth."

What's 'Adequate'?

Let's look at a recent example: Americans who earn average annual incomes of $11,700 to $31,200 during their careers will have to work until they're 76 years old to have just a 50% chance of covering basic expenses in retirement, according to the Employee Benefit Research Institute. The situation is even worse for the poorest workers: Most people earning less than $11,700 per year would need to wait until they're 84 to enjoy the same odds.

But a study by economists at the University of Wisconsin at Madison and the Urban Institute found that more than 80% of households had accumulated their optimal wealth targets for retirement, and the lowest-income households were in better shape than most.

In a word: Huh? How can two retirement-readiness studies produce such different results? Wisconsin's John Karl Scholz and his colleagues used a "lifecycle" model that focuses on maintaining the same lifestyle after someone stops working. "We infer how much the household members have been consuming over their working lives and then look at the resources they would need to maintain those living standards, adjusting for arrival or departure of children" and other expenses, he explains.

How do you feel about your future retirement?
Prepared 637 (27.2%)
Worried. I may not have saved enough660 (28.2%)
I felt good, until the recent financial events...972 (41.6%)
I haven't planned much, but am not worried.70 (3.0%)

For retirees who aren't springing for lavish weddings for their adult children or funding grandchildren's college tuitions, child-related costs decline after retirement, along with expenses for work clothing, commuting and meals. For instance, a study by economists at Princeton and the University of Chicago found that retirees substitute time for money: They eat the same number of calories, but spend less on food because they have more time to shop sales, clip coupons, grow vegetables and so on.

Do Expenses Grow or Shrink in Retirement?

Thus under the lifecycle or "income-smoothing" method, low-wage workers do fine. "For a quite low lifetime earner, Social Security should be generous enough to maintain pre-retirement consumption standards without any saving whatsoever," Scholz says. "That's why you see a lot of low-skilled workers claiming Social Security benefits at age 62. A low-income worker who has 35 years of work history could retire at the normal retirement age and have Social Security replace 145% of their average indexed monthly earnings – their own 90% benefit plus a 50% spousal benefit on top of that. So I'm really puzzled about the (EBRI) results at the bottom here."

However, EBRI research director Jack VanDerhei argues that the lifecycle model falls short. "It's just saying you have managed to make virtually nothing in your working years and you have nothing in retirement, so you have therefore smoothed your income," he says. "If that's the definition of success, there are a lot of people on the (lower) income scale who will be considered successful in that model that wouldn't be in my model. I go back and factor in minimum expenditures that would be desired."

The heaviest of those desired expenditures is health care. "The No. 1 cause of failure for people who get to retirement age with what appears to be an adequate amount of money is to get hit with nursing-home costs," says VanDerhei, who argues that his retirement-security projection model does a better job accounting for potential health shocks.

Ignore the Alarms

In any case, that debate underscores why you should ignore the alarming news about retirement readiness and focus on what counts: practical planning for your own post-work life.

For the youngest workers, that means ignoring the recent market gyrations and emphasizing saving in a tax-advantaged vehicle, such as a 401(k) plan or individual retirement account. Because it's your level of contribution that matters most – far more than which of the different investments you choose or how they perform.

Putnam Investments compared those three key nest-egg components over a 15-year period, from January 1990 to December 2004, and found that investment performance actually had the lowest impact. If investors selected only the top quarter of all mutual funds during this 15-year period, their retirement wealth would only be 6% more than if they had selected funds in the bottom quarter.

As for asset allocation, shifting from a conservative portfolio to a more aggressive one improved results by more than 20%. But increasing contribution rates made the biggest difference: a 2% point increase (from 2% to 4% of investors' salary, for instance) doubled investors' retirement wealth during the study period. That gave the contribution amount 90 times the impact of picking the best funds.

What to Do Now

For older workers, retirement readiness means making sure you're comfortable with the risk profile of your portfolio; getting a solid handle on your consumption needs; adopting or maintaining a healthy lifestyle as a hedge against medical costs; and considering both savings and nonfinancial resources, such as family support, as part of your plan.

"People in their 50s could get a pretty close approximation of [their] needs by monitoring what they are spending now, literally writing it down and doing the budgeting and deciding whether it is comfortable," Scholz says. "Once you have a good idea of what the outflow is going to be, it's a relatively straightforward matter" of balancing that number against assets.

Add up all potential income sources, including estimated Social Security benefits; any home equity that could be freed up by selling and downsizing; any company pension; and savings in defined contribution plans. (Ideally, investors would want to withdraw no more than 4% to 5% a year from those retirement plans to try to make sure the money doesn't run out before they die. Therefore, a nest egg of $500,000 would yield an annual income of $20,000 to $25,000.)

Lower Standards

Scholz estimates that up to 20% of Americans will have to radically slash their living standards, work much longer than they planned or lean on government entitlements and family for support. But, he adds, "we find most people muddle through in a reasonable way."

VanDerhei, who admits his predictions have earned him the nickname "Dr. Doom," disagrees. The number of failed retirees -- those who must rely on family, charity and the government to survive -- is growing, he says, and that's bound to impact the economy. The fallout from failed retirees so far has been barely noticeable compared to what will happen when the bulk of Baby Boomers retire, he says.

"It will be much more problematic to expect society at large to be able to handle at least twice as many family units who would not have enough for minimum expenditures plus uninsured medical costs," VanDerhei says. "It's more unsuccessful retirements that need to be spread over a smaller base of working individuals and government revenues -- and that's going to make it much more difficult for the status quo to stay intact."


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Johnson Smith

Planning should be done beforehand so that the people can have a good sum of money for themselves when the time will come
http://www.paydayau.com.au

September 12 2011 at 8:10 AM Report abuse rate up rate down Reply
billcac

I knew it was a sucker move to get more people from Main Street to put their hard earned money into stocks yesterday and then have the money men sell off today!

August 10 2011 at 11:46 AM Report abuse rate up rate down Reply
gted1954

That's why they are refered to as "the golden years" You will need a lot of gold to get by.

August 10 2011 at 5:30 AM Report abuse +1 rate up rate down Reply
Sam Das

Live for today and prepare for tomorrow, hopefully in between you will find your fully funded retirement. Good Luck

August 10 2011 at 3:06 AM Report abuse +1 rate up rate down Reply
geoff

what way plan according the progressive left Democrats the government is going to take care of us all lol or was that a joke if it was it was funny i don't care who you are

August 10 2011 at 12:45 AM Report abuse rate up rate down Reply
1 reply to geoff's comment
robertvptrsn

It may sound a bit paranoid now, but I don't think it's outside the relm of possibility that our goverment will at some point decide that individuals are just too stupid to invest their lifesavings all on their own and decide to confiscate our retirement funds. All those trillions of dollars will sure help this country's balance sheet. Then Big Brother will determine just how much (or too little) to disperse to us on a monthly basis to meet our basic needs.
Maybe this Orwellian scenario will play out in our lifetimes especially if B.O. somehow gets elected to another term.

August 10 2011 at 2:39 AM Report abuse +2 rate up rate down Reply
savemycountry911

Invest in dried beans. They keep well, are nutritious, taste good and you can make your own gas.

August 09 2011 at 9:26 PM Report abuse rate up rate down Reply
mrspelosi

I have been waiting for all my liberal friends to thank the tea party for the market being up over 400 points today. Yesterday all my liberal friends were in hysterics blaming the the tea party for the market dropping over 600 points. My liberal friends think that the tea party has that kind of influence on the market. So with that I say, thank you tea party for the upswing in the market today, from all my liberal friends dears.

August 09 2011 at 5:47 PM Report abuse +1 rate up rate down Reply
toosmart4u

Susan, they will not bring about a 10% tax for then the rich would have to pay some taxes and we know the republicans do not want that. They want the little tax payer to pay for everything.

August 09 2011 at 5:39 PM Report abuse -2 rate up rate down Reply
3 replies to toosmart4u's comment
Susan

Why not have a flat 10% tax rate for everyone that receives a pay check, from welfare to billionaires?

August 09 2011 at 5:22 PM Report abuse +1 rate up rate down Reply
1 reply to Susan's comment
savemycountry911

Why not? Because that would be fair.

August 09 2011 at 8:09 PM Report abuse +1 rate up rate down Reply
Tupalov144

HOLLYWOOD MAKES SEQUELS, 'THE RETURN OF THE FED CHAIRMAN' ????

August 09 2011 at 5:15 PM Report abuse rate up rate down Reply