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February, 2017


When can I safely retire? From several sources, the distressing evidence is that most of us are not doing enough to prepare for an end to our work-a-day routines. Assuming about 20% of our retirement income will come from Social Security and that we take around 4% annually in income distributions, experts say to retire securely we need 11 times pre-retirement income set aside in savings and investments. Instead, more than two-thirds of us are not putting away nearly enough funds for our leisure years.

How about you? A number of websites will assist in calculating where we are (for our ages and incomes) on a glide path toward financial security.

For a couple, household income is considered as a whole. Say the combined earnings are $100,000 annually, then a retirement nest egg would appropriately be $1,100,000 (11 x $100,000). The figure takes into account that the average retiree will live another 20-30 years, invest conservatively, need about 70% of pre-retirement income for regular expenses, and have his or her buying power gradually reduced by inflation.

Actual average pre-retirement household income for people in their sixties is lower, though, roughly $75,000 a year in the U.S. So, using that amount, combined household savings and investments of approximately $825,000 are suggested before giving up earnings and attending our retirement parties.

There is some confusion about the recommended levels. Some calculators take into account the anticipated Social Security income, while some do not, in setting the ratio of nest egg to annual earnings at a multiple of 11. Clearly, if Social Security on average is to provide 20% of retirement income and is part of that 11 times pre-retirement earnings target, the balance needed in one's nest egg would be lower, $660,000 in the above instance.

Another way to look at it is that about 70% of pre-retirement income will typically be needed in retirement, at a minimum, and this is without extras like budgeting for increased health care costs (as there is of course an inevitable decline in people's capacities as they age) or like additional travel one may want to do in checking off bucket list kinds of activities. If our household income prior to beginning the Life of Riley was $75,000, 70% of that is $52,500. The suggested average 20% of retirement income from Social Security works out to $10,500 a year, leaving $42,000 a year to be obtained from nest egg income distributions. Dividing that figure by 0.04 (representing the 4% recommended level of yearly distribution, to avoid running out of one's nest egg principal) leaves us with a minimum household nest egg amount (not counting Social Security) of $1,050,000.

Yet the mean level of retirement savings at age 65 in this country is about $200,000, $400,000 for a couple. The significance of the earlier stat, that about two-thirds of us are not putting enough aside for retirement, is apparent in those figures. 4% of $400,000 is just $16,000. Combined with the average yearly Social Security payment by household, this means per year income for a retiring couple works out to a mean of only about $38,000 ($19,000 apiece), more or less half of pre-retirement income. This naturally considers merely the averages. Many have retirement incomes far lower.

What to do? If one finds his or her retirement nest egg to be too low, join the club. The majority of us at one time or another have been in the same boat. Certainly I have. Financial advisors have in years past suggested people save and invest around 10% annually toward their eventual financial independence. These days, though, there may be a few problems with that low a percentage:

  1. Most are already behind the curve by a large amount.

  2. In the past decade, total returns from stocks and bonds have not been up to their longer-term standards, and this appears likely to continue for at least the next few years.

  3. Social Security and Medicare benefits probably will be reduced, so more of the retirement funds' slack will need to come out of our own savings and investments.

  4. Fewer children may be content to have their aging parents live with them than previously, so the onus becomes greater on the more advanced generations to fully fund their own residential expenses.

  5. We live perhaps in more uncertain times than has been the case since the end of World War II. Over the prior twenty year period, we have experienced our country's worst terrorist attack, most economically devastating hurricanes, and the harshest recession since the 1930s. Many nations around the globe have suffered even more difficult circumstances.

Instability can lead to adverse changes in currency, economic outlook, security, credit ratings, basic utilities, goods, services, taxes, the value of real estate, internet access, etc., all of which could jeopardize one's buying power.

To get us back on track and remain there, a 15% annual investment in equities and/or bonds is now recommended, more if sustainable and practical.

Alternatively, we can plan to put off full retirement, maintaining part-time work for awhile after leaving our primary sources of earnings. We might also consider sharing residence costs with more than one household and in other ways being more frugal in our later years. Having greater than average income from Social Security will be a possibility for some and could substantially alter the calculations of what is required in the retiree's nest egg.

Finally, everything else being equal, the earlier we can start to regularly invest, the better. Just $5000 used to purchase shares in a S&P 500 Index fund (Vanguard 500 Index Fund Investor Shares [VFINX]), at the end of January, 1977, with an equal amount added annually thereafter, would have become more than two million dollars by the end of January, 2017.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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