Will you have enough to retire? Will it last long enough?

How can you know whether you will have enough to retire? This daunting question occupies the minds of American workers from those in their 20s to mid-60s. Workers in their 20s usually want to know how much they should be saving, whereas those in their mid-60s wonder how much they will spend in retirement and how long they will live.

Uncertainty surrounding these questions and the lack of an easy or quick method of determining the answer for each individual has resulted in a wide variance of preparedness for retirement. According to Putnam Investments, “7 million Americans age 61 and older have returned to work within 18 months of retiring.” Undoubtedly, a significant percentage of these retirees found their investment for retirement insufficient to meet their income requirements.

How much will you spend in retirement?
Financial experts have traditionally used a simple rule of thumb, recommending that individuals will need between 50% and 85% of their pre-retirement income when they retire. Survey data available now tell us that these traditional expectations may have been too optimistic. According to the Employee Benefit Research Institute, “55% of retirees said they need income that’s equal to 95% of their pre-retirement income – or more.”

The Fidelity Research Institute 2007 Retirement Index found that almost half of those interviewed expected their expenses to fall in retirement, but 67% of surveyed retirees found their monthly expenses to be about the same as or higher than before retiring. The Center for Retirement Research at Boston College concluded that “more than four out of 10 Americans are ‘at risk’ for being unable to maintain their standard of living.”

Will your resources last long enough?
Workers must plan for a long retirement. According to Annuity 2000 Mortality Tables, there’s a 75% probability that at least one spouse of a household will live to age 86, a 50% probability that a spouse will live to 91, and a 25% probability that a spouse will live to 96. This means an average worker who hopes to retire around 65 and not return to work will have to fund 25 to 35 years of retirement expenses from savings.

An increasingly expensive variable that most have failed
to consider is health care expenses. According to Fidelity, “a couple in their mid-60s will spend an estimated $215,000 on out-of-pocket medical expenses, excluding long term care, by the time they are 85.” With health care costs increasing each year, this expense will do nothing but grow for the average retiree.

What can you do?

1. Start saving early and save as much as you can. The sooner you accumulate retirement savings and the longer time period you have to when you will need to draw on the money, the better off you will be.
2. Control your investment expenses. Investment expenses
   reduce the earnings of your accounts, which can dramatically reduce your compounded return over time.
3. Choose an asset allocation that fits your age and objectives. According to the Employee Benefit Research Institute, just 35% of people age 20 to 29 have more than 80% of their investments in stock, and nearly 20% have no stock at all.
4. Choose a withdrawal rate that will not quickly deplete your
   assets and will be sustainable given your asset allocation. Based on calculations by Morningstar, if you have $500,000 in your account, retire at age 65, and withdraw about 8% a year, you will run out of money by approximately age 77. If you withdraw 6%, you’ll have enough money until approximately age 82. If you withdraw 4%, you’ll have enough until approximately age 95.

A sustainable withdrawal rate will vary, depending on your asset allocation and the performance of your investments. When combined with the life expectancy information provided here, you can quickly see that investors need to target a 4-5% withdrawal rate if they want an account that will be sustainable over their retirement.

For more information and a comprehensive review of your personal and retirement plan investments, please contact Schenck Investment Solutions LLC at 800-236-2246 or 920-731-8111.

Jesse L. Nelson, MBA, is an investment manager with Schenck Investment Solutions LLC. In addition to constructing and managing portfolios for individual clients and 401(k) plan participants, Jesse also researches and analyzes stocks
and mutual funds.

September 2007