Scary Retirement Predictions Don't Have to Ruin Your Life

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RetirementWhy have predictions about retirement become so dour and hopeless?

Maybe it's the seeming lack of understanding that so many retirement experts seem to have on the topic. Consider some recent advice:
  • A study from Fidelity recently said that by age 35, you should have savings equal to your annual salary. By 45, that number should be up to three times your salary, rising further to five times by age 55. By retirement age (67), eight times your salary is the appropriate target -- understanding, of course, that your salary has probably risen steadily all along the way.
  • Consulting firm Aon Hewitt is even more aggressive, arguing you should have 11 times your salary saved up by age 65.
  • A contributor to Forbes set lofty and aggressive goals for how much you should save throughout your lifetime, arguing that even teens need to start saving significant amounts. If you start at age 15, saving 8% of your annual income for the rest of your life should be sufficient. But wait until age 35, as many people do, and you'll have to kick up your savings rate to more than 30%.
This last approach isn't as bad as it may seem, because it recognizes that when you boost your savings rate, you're actually accomplishing two valuable things. First and foremost, you're putting aside more money that you can use later. But the equally important accomplishment from boosting savings is that you're learning to live on less money now, which in turn can reduce your lifestyle expectations for the rest of your life, including after you retire.

The Better Way to Ensure Retirement Success

Still, the major flaw in all of these studies is that they make completely unrealistic assumptions about saving behavior.

Like taking vitamins and going to the gym every other day, we all know we're supposed to save for retirement. The challenge, though, is making that task real. With so many pressing needs on our time and financial resources right now, the idea of planning for something that's decades away requires a radical shift in the way you think about your money.

Although putting aside a fixed percentage from each and every paycheck works for some people, many have a lot more trouble avoiding the unexpected problems that can force you to make changes to your saving strategy – and they feel like once they've missed a single month there's no point in trying to get back on track. And return assumptions are only as good as the predictions they're based on. The last several years should have convinced you how tenuous a connection some predictions have to eventual reality.

So instead of driving yourself crazy trying to save 30% or more of your paycheck to make up for lost time, consider this simpler strategy:

1. Save what you can. The real point behind rules like saving 10% to 15% from each paycheck is to get you used to saving and to get your portfolio balances moving higher as quickly as possible. But if you can cut your spending more, don't limit yourself -- put aside even greater amounts. Conversely, if you're going through a rough patch, don't beat yourself up; try to save something even if it doesn't match your usual target.

2. Stay flexible. Most studies assume that you'll need 80% to 90% of your pre-retirement salary to retire on. Only you can determine how realistic that figure is, but many have found that they spend far less in retirement, in part because having more time gives you flexibility to take advantage of deals that you may not have had the opportunity to use earlier in life. You can live on a much smaller nest egg if you control discretionary spending after you retire.

3. Invest better. Saving won't do you much good if you're only earning 0.01% in a bank savings account. Retirement investing is all about risk, and as scary as the stock market may be, it's a great place to earn the long-term returns you'll need in order to reach your retirement goals. Whether you go with simple index funds or learn enough to choose individual stocks, better investing will leave you with more money when you need it.

Scary retirement predictions make great headlines, but they don't have to ruin your life. If you can craft these concepts into your own personalized retirement savings plan, they'll serve you well.

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MR NUSSBAUM

I think that most people can only save a small amount of money each year. The cost of living ie food, transportation, housing and family are very expensive and leave little to save. That being said the only way I was able to do that was to not buy anything unless it was absolutely needed for a period of 10 years. It was a good sacrifice and allowed me to build a nest egg. Also I do not believe in investing in the stock market or anything else mainly because you can lose as easlly as you can gain. Why be dependent on others? I just get CD;S at internet banks that pay enough and I never have to worry. Retirement may in fact be working as long as you can and not some fixed number. That will also add to your money and income even if it is a part time job. Basically control the future on your own terms by living conservitively and saving as much as possible. It has worked for me.

October 08 2012 at 4:04 AM Report abuse rate up rate down Reply
Artie

Another useless financial artilcle.

October 08 2012 at 1:37 AM Report abuse rate up rate down Reply
Artie

The above article along with it's rules of thumb about how much money you SHOULD have at a given age is beyond inane. Everyone's circumstances is different. However, that said, the first rule of personal finance is to "pay yourself first." Even if you start out small, invest something steadily each month. Saving for retirement should start early, otherwise, you'll be playing catch up at an age when you should be thinking of slowing down...unless you want to work the rest of your life while your physically able.. Also, learn how to invest. Putting your money in a bank account paying fractional interest rates isn't going to work. We are living in extraordinarily difficult economic times.We are living through the worst period economically in this country since the Great Depression. And, while it seems on the surface to be getting better, it could collapse again when interest rates start rising and we see some REAL inflaction. It is impossible to grow your money and keep up with inflation and the rising cost of living earning nothing in a bank. It is still amazing to me that in this day and age, with all the useless courses they teach in high school and college, there isn't a mandatory course requirement to take a course inr basic personal finance and investing.. That is why we have a nation of financial dummies out there that are clueless. This is also why the retirement prospects for so many people in this country are so dire. And lets not forget those greedy bastards on Wall Street and inept dumbass politicians that caused the housing collapse that precipitated the virtual collapse of an economy built as a house of cards. Some example...we have a country that is bankrupt and spends more money than it takes in, and yet we want individuals to know how to balance a budget and provide for a reasonably comfortable retirement. Social security was NEVER meant to be the sole source of your retirement income. And, if this country keeps going the way that it is, there won't even be social security to count on.

October 08 2012 at 1:36 AM Report abuse rate up rate down Reply
Bob

After you get to a million in your retirement fund the savings accelerates even faster. The miracle of compounding and interest! But today you can't do it in a bank You have to take some risk.

October 07 2012 at 12:46 AM Report abuse rate up rate down Reply
rcohan

America doesn't like to speak about pensions to much and it's not talked about in school. Why? Because that benefit is reserved for city, state and federal jobs, where everyone gets to retire at 62 supported by their pension plus SS, with savings added on as an "extra" not what they are depending on. A pension is crucial for retirement. Going forward people will wise up and do whatever they have to do to get a pension. It's either work for the city, state or federal gov. Or move to Canada because in Canada everyone gets to retire with both company and state pensions. Studies show people in Canada are some of the happiest in the world. They don't base their entire lives on saving enough money to not be homeless when their old or working till they die. America used to be great but inflation grew at ten times the rate of salaries making it all but impossible to save in today’s America. The average American lives in fear scrimping and just hoping they can make it through old age. It's a terrible way to live. In fact it's horrible. The 5 happiest countries are listed below. It's plain to see the common denominator is some form of socialism. People in these countries don't live their entire lives in fear. The culture that surrounds them is not sink or swim. They are able to live happy lives knowing they can retire when they are older. If they save money it's simply a bonus to their retirement and not what their lives are depending on. World's happiest countries:
http://travel.yahoo.com/ideas/world-s-happiest-places.html?page=all
Denmark: First Place
Finland: Second Place
Norway: Third Place
Netherlands: Fourth Place
Canada: Fifth Place

October 06 2012 at 4:26 PM Report abuse rate up rate down Reply
2 replies to rcohan's comment
BSwartz

Sounds great if it were that easy. Those of us who have pensions, the state & federal gov't keeps passing more & more regulation to limit them, end them or make you keep working longer for less. Yet, congress is set for life with their pension plans & medical care. Our gov't can provide nicely for themselves in retirement, but not so for the commoners. The US gov't is an elitist group of individuals completely out of touch with the average American citizen. They expect us to just get by as if they have done us a favor. Those of us who try to save to enhance a pension or as a sole means for retirement find it increasingly more difficult to do so, as you say, due to inflation. And every time you think things might be ok, some other manufactured crisis comes along to justify increased gas prices, food prices etc. all the while your home loses in value & taxes keep on rising in all sectors - state, federal & local. When you do get a paycheck, nearly 50% is eaten up in taxes, healthcare costs & increasing contributions to a pension plan of which you get less of. The problem is that we have been paying enough in taxes for the longest time, however our gov't has frivolously spent it for their pet projects or have funded their lobbyist's agendas to get themselves re-elected. With that much power & corruption in place, why would the US gov't politicians want to let go of all of that for the average American citizen to live comfortably in retirement & not have to live in fear & worry????? America is sadly imploding due to corporate greed & political corruption & power spun out of control. Just look at the political ads for this upcoming presidential election. All they do is bash & bully one another & promise us anything we want to hear to get elected, only to do whatever the hell they want once they are elected. There is no answer to end that.

October 06 2012 at 9:20 PM Report abuse rate up rate down Reply
donut999

Agree with the list. Note the top 3 are socialistic Scandanavian countries. Cradle to grave care, out of this world taxation (using VAT's). Worked for a company in Finland for 3 years and spent many months on the ground there and 2 and 3 on the list. Finland consists of Helsinki, and the rest is basically a farm. Population about the size of metro Philly. 2 or 3% rich elite. Balance basically peasants, but well cared for peasants. Biggest lament of CEO of the large company I worked for "These Finns will not work" Guess I wouldn't either since life is pretty much the same whether you work or not. Part of the reason they are content or happy is they have low expectations. Pea soup on Thursday, lots of schapps (vodka) all the time.

October 07 2012 at 6:18 AM Report abuse +1 rate up rate down Reply
dubricus

It's not that these type articles make unrealistic assumptions about savings behavior... it's that they make totally unrealistic assumptions about life in general... about anyone's real ability to plan... about how much good it will do to save even 50% of a minimum wage salary (even if one could while trying to support oneself).

Many people were sitting pretty... had all sorts of plans right on schedule and on target... until 2008.... they got laid off at the age of 55... unable to find any work.. they went thru unemployment, then savings, then retirement funds... now they have chronic, age related health issues, no insurance, and will be left with Social Security... but the bad part is that they still have a couple of years to go... no income, no savings... until Social Security.

Man proposes, God disposes.

October 06 2012 at 1:56 AM Report abuse +2 rate up rate down Reply
talari

Don't worry, The Government will take care of you.

October 06 2012 at 1:41 AM Report abuse -1 rate up rate down Reply
1 reply to talari's comment
BSwartz

NOT!!!!! See my comment above.

October 06 2012 at 9:22 PM Report abuse -2 rate up rate down Reply
kasteiner49

Sorry, but the 3 suggestions in this article do not in my opinion represent "the better way to ensure retirement success." Having accumulated savings of 8 times your final year's gross pay when you retire at age 67 will enable you to replace about 40% of such pay throughout a 25-year retirement with inflationary increases under the following assumptions during retirement: 5% annual investment return on accumulated savings and 3% annual inflation. For example, if your final year's gross pay is $50,000 and you have accumulated savings of $400,000, you could withdraw $20,000 in the first year of retirement, increasing by 3% per annum thereafter for 25 years (assuming you earned 5% per annum, lived exactly 25 years and withdrew exactly 5% plus 3% inflation increases each year).

Is 8 times pay the correct amount? Who knows. It depends on many factors (in addition to realization of the assumptions used to develop it). But, if you don't have any sources of retirement income other than Social Security, you need to be working toward some goal. Either that or you need to add a fourth item to the list of "ensuring retirement success", and that item is learning to live on less in retirement.

October 05 2012 at 11:13 PM Report abuse rate up rate down Reply
3 replies to kasteiner49's comment
kasteiner49

Sorry, but the 3 suggestions in this article do not in my opinion represent "the better way to ensure retirement success." Having accumulated savings of 8 times your final year's gross pay when you retire at age 67 will enable you to replace about 40% of such pay throughout a 25-year retirement with inflationary increases under the following assumptions during retirement: 5% annual investment return on accumulated savings and 3% annual inflation. For example, if your final year's gross pay is $50,000 and you have accumulated savings of $400,000, you could withdraw $20,000 in the first year of retirement, increasing by 3% per annum thereafter for 25 years (assuming you earned 5% per annum, lived exactly 25 years and withdrew exactly 5% plus 3% inflation increases each year).

Is 8 times pay the correct amount? Who knows. It depends on many factors (in addition to realization of the assumptions used to develop it). But, if you don't have any sources of retirement income other than Social Security, you need to be working toward some goal. Either that or you need to add a fourth item to the list of "ensuring retirement success", and that item is learning to live on less in retirement.

For more discussions of how much you may need for retirement and how much you can spend in retirement, visit my website (totally free with no financial benefit enuring to me)

http://www.howmuchcaniaffordtospendinretirement.webs.com/

October 05 2012 at 11:03 PM Report abuse rate up rate down Reply
kitharris1

testing

October 05 2012 at 3:50 PM Report abuse rate up rate down Reply