By Paul Solman
Originally Posted On June 5, 2013
PBS NewsHour business and economics correspondent Paul Solman is now answering questions from Next Avenue visitors about personal finances, business and the economy. His advice will appear on Next Avenue as well as Solman's PBSNewsHour blog, Making Sen$e With Paul Solman, and the Rundown, NewsHour's blog of news and insight. PBS NewsHour is an hour-long television news program and accompanying website with the mission of providing intelligent, balanced and in-depth reporting and analysis of the day's most important domestic and international issues and news events.
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What is the biggest mistake the baby boom generation is making as they plan for retirement? — Nancy Driscoll
That's easy: They're not doing any — or nearly enough — retirement planning.
Let me use this question to try to beat some sense into you about retirement, assuming that you're a typical American baby boomer in need of some financial tough love.
The Retirement Savings Rule of Thumb
The usual rule-of-thumb is that in retirement, you'll require roughly 80 percent of your current income to live comfortably — that is, pretty much the way you live now.
Myself, I use a full 100 percent rule-of-thumb, since I don't live profligately, which means there's not a lot of excess I'll be able to cut from my expenses in retirement. And who knows what extra medical expenses I may incur, such as elder care?
So if you now earn $50,000 a year, you presumably need to generate $40,000 to $50,000 annually in retirement; if you earn $100,000 a year, you need $80,000 to $100,000, and so on.
Assume that you have saved $250,000, a royal sum by actual American retiree standards these days. Assume further that you want a risk-free assurance that you won't lose the money while it generates income to pay for your retirement until death.
An Annuity for Retirement Income
The standard way to do this is give the $250,000 to a reputable, low-cost money management firm like Vanguard in return for an annual payment until you die — an annuity. I just went to Vanguard's online annuity calculator to generate the stream of payments that $250,000 can buy.
The older you are, quite reasonably, the higher your payments will be, since you have fewer years left to live and an annuity promises to make payments until you die. It's the equivalent of earning a return on your money while gradually drawing out the principal.
I'm 67. According to the software, I would get something like $7,700 a year for every $100,000 I put in. So an investment of $250,000 would buy less than $20,000 a year in annuity payments. Add in Social Security — about $25,000, pretty much the max for someone at age 67 — and I would gross around $45,000 a year.
Now, just to be conservative, let's use the 80 percent rule-of-thumb for income. Since $45,000 is 80 percent of about $56,000, this means that if a boomer's hypothetical income when reaching retirement was more than $56,000, he or she had better sock away more than $250,000.
How Much Americans Save for Retirement
Most Americans don't even come close to that goal. Although half of households make more than $50,000 a year, a mere 10 percent of Americans have saved $250,000 or more, according to the latest data I've seen.
Of course, many more boomers now plan to continue working, as do I. But this strategy is based on two potentially faulty assumptions: Employment will continue to be readily available and you'll maintain the ability to perform.
The message, then, is simple: Wake up, America. Smell the coffee and start saving whatever you can.
Most of you are going to need it.
Paul Solman is a member of the Twitterati and can be followed at Twitter@paulsolman. His daily blog can be followed, well, daily at Making Sen$e by linking here, or just Googling the words: "Making Sense."