Hard Truths about Retirement
I wish I had better news. This is a study that came out from Boston College about the nature of our retirement and how we’ve prepared…and it’s not good.
What we know is that pensions are dying out, and that’s the old standard of the guaranteed payment every month when you retire after you’ve been working at a place for thirty years or so. Now we don’t have those any longer. Newer employees don’t even have that option.
Social Security—we still have that, but, of course, it’s in doubt for our younger generations. They have concerns about that. But at this point, we expect Social Security to replace about 40% of our pre-retirement income.
So, now we’re left with the 401(k). That is the norm. Anybody starting in a new job will be faced with a 401(k) and those options. But we need to be able to replace—between Social Security and that 401(k)—about 85% of our pre-retirement income if we want to live a decent life. What we’re finding is that we’re not doing what we should be doing to get to that point.
The Boston College study said that our median size of a 401(k) for those approaching retirement is only $149,400. That’s less than $150,000! That’s just not going to cut it. And only about 60% of households even have a 401(k). Many people aren’t even participating. Now, what they used is a 6% withdrawal rate in retirement. Some advisors will even bump down to a 4% draw. That means that $149,000 can only produce about $9,000 a year or about $756 a month. That’s not enough to live on. That’s not going to make up the difference between what we’re drawing from Social Security and what we need to pay our bills.
So, we’ll go back to those median numbers, and Boston College tells us the median income at retirement—and this is nationwide—is $87,700. If we say we’ve got to replace 85% of that, that’s $74,545. Social Security will provide for that household a little over $35,000. So, now we’ve got a gap of almost $40,000. Well, what kind of pile of money do we have to have in order to produce that $40,000 every year? The answer is $636,673. That’s a lot of money. And if we go back and look at those median numbers of less than $150,000 in retirement, we have a long way to go. That’s the hard, bad news.
Now we have to come back to: Well, what can we do? How do we make up this difference?
The first thing we’ve got to do is: We MUST increase our contributions. And I point to what’s happening with state employees. As of the first of the year, between what they’re putting in and what the state is putting in, the total is now a little over 22%. That needs to be our guideline. We need to be aiming for 20-25% of our money, between employee and employer matches, going into our 401(k)s.
We also need to get help with the investment choices, because you’re left with a set of mutual funds. And if you’re not sure how to choose, find someone you can pay by the hour to look at those maybe once a year with you. Get educated about those mutual funds, and make good choices.
We have to face the hard fact: We may have to work longer. We may have to delay those retirements in order to build up the amount that we need. For many people, they’re going to be facing part-time work even in retirement.
The good news for younger people is: Time is on your side. So go ahead and start increasing your contributions, looking at that set of mutual funds and make the most of it right now. It’s easier when you’re 30 than when you’re 50.