As the profile of the American retiree continues to change, the answer to the age-old (no pun intended) question about how much savings you need in retirement is no longer as static as it once was, either.
Decades ago, the pat answer for the average American was $1 million; having $1 million set aside in savings at retirement meant that you could tap your account at the rate of five percent per year and receive $50,000 annually without (in what was an average market year back then) risking the principal.
However, a wildly-unpredictable era in the performance of equities markets has ushered in lower suggested withdrawal rates of two to three percent per year. At a withdrawal rate of three percent, one’s retirement savings would have to total nearly $1,700,000.00 to receive the same $50,000 per year.
Based on what we know about how badly Americans are doing at saving much money at all these days, expecting an appreciable number of them to have accumulated a sum that large by retirement is unrealistic.
Interestingly, many of them seem to agree, but rather than be frightened by the prospect of missing the mark, they seem to be readjusting their expectations.
As mentioned in an article over at CNBC.com, a recent retirement confidence survey by the Employee Benefit Research Institute points out that roughly two-thirds of Americans say they will not need as much as $ 1 million socked away in order to manage retirement.
That’s a lot of people, to be sure, considering how long the culture has been inundated with the message that even Joe Average should have a million bucks tucked away when he stops working altogether.
Ahh...and THAT might be the very issue that has prompted so many Americans took like at their retirement savings needs so differently; other data regularly points out that more and more Americans plan to work in some capacity during retirement, essentially eliminating the very concept of retirement altogether.
Let’s face it, if you’re still making, say, $1,500 per month in earnings, that’s $1,500 per month less that has to be covered by interest derived from your retirement account(s). Factor in even a diminished monthly check from Social Security, and now it’s possible that you can get by on a nest egg that’s quite a bit smaller than $1 million.
Of course, there’s considerable risk in making financial projections based on the assumption that you’ll work throughout retirement, including the prominent risk that your health will suddenly fail in a way that not only makes continued employment prohibitive, but also creates an acute, dramatic strain on whatever financial resources you have managed to accrue.
Nevertheless, more and more people are confidently making such plans and assuming the risks.
Will it all work out?
That very much remains to be seen.
By Robert G. Yetman, Jr. Editor At Large