How to know if you have enough to retire

By Robert Powell, MarketWatch, May 25, 2013

Odds are high that you haven’t saved enough money to retire in the manner in which you desire. That’s the bad news. The good news is that you can easily gauge just how close or far away you might be. And the first to thing to check is how much you have set aside for retirement.

The average so-called full-career worker at a large employer needs to have 11 times their pay, after Social Security, set aside at age 65 in their retirement nest egg to expect to have sufficient assets to get through retirement.

Or least so says research conducted by Aon Hewitt, which has been studying whether workers at large firms will have the financial resources to meet their post-retirement needs since 2008. Including Social Security, you will need 15.9 times pay to maintain your standard of living throughout your retirement years.

According to Aon Hewitt’s Real Deal 2012 Retirement Income Adequacy at Large Companies study, workers who have 11 times pay set aside when combined with Social Security will be able to replace in year one of retirement 85% of their pre-retirement income. Read that research.  The 85% rule of thumb reflects one’s final salary, adjusted for decreased savings and taxes,  increasing medical costs and changing expenditures in general, and inflation.

Of course, there are some adjustments that must be made to this rule of thumb based on your income. (We’ll talk more about that in a second.) But in essence, one quick way to determine if you’re on track to having enough money for retirement is to divide your assets earmarked for retirement by your salary.

So, for instance, if you’ve got $500,000 set aside and your salary is $50,000, you’ll have 10 times your pay to fund your retirement, which, based on Aon Hewitt’s study, is just barely enough money to maintain your standard of living in retirement.

Will you be prepared if you keep doing what you’re doing?

Now truth be told, many workers don’t have enough set aside to maintain their standard of living in retirement. In fact, the Aon Hewitt study projects that the employees who currently contribute to their employers’ savings plans and who retire at age 65 after a full career will, on average, accumulate retirement resources of 8.8 times their pay, which is a shortfall of 2.2 times pay. Workers who don’t have a defined benefit face a shortfall of 3.8 time pay.

Of course, averages can be misleading. So for context, consider this: Some people are on track to retire in comfort and some are off by quite a bit, according to Aon Hewitt’s study.

Almost 30% of employees are now on track to retire comfortably at age 65, while 21% of employees are expected to have a shortfall of more than six times pay at age 65.

For the record, the resources calculated by Aon Hewitt include accumulations of employee savings in their employers’ defined contribution plans (4.1 times pay), accumulations of employers’ additions to defined contribution plans (2.6 times pay), and defined benefit pensions (2.1 times pay).

Workers saving for retirement using a Fidelity 401(k), by the way, now have on average $80,900 in those accounts and workers 55 and older have, on average, $150,300 set aside, according to a release. Read Fidelity Reports Record Gains For 401 (K) Savers Since 2009 Market Low.

To be fair, Aon Hewitt’s study does not reflect savings or other retirement assets outside of the employer-sponsored plans, which is where many people also save for retirement. And for some, the amounts saved in an IRA could make up some of the 2.2 times pay shortfall.

For instance, the total average IRA account balance in 2011 was $70,915, while the average IRA individual balance (all accounts from the same person combined, since many individuals own more than one IRA) was $87,668, according to a report released this week by the Employee Benefit Research Institute (EBRI).

But there is one more caveat. The 2.2 pay shortfall applies only to Aon Hewitt refers to as full-career contributors, workers who have 30 years of employment and contribute to a 401(k). Other workers, those who don’t contribute to a 401(k), face a 10.8 times pay, and all employees face a shortfall of 5.3 times pay.

What can you do to improve the outcome?

So what can the average worker do to make up the nest egg shortfall if they have one, and assuming they don’t want to reduce their standard of living in retirement?

First, save more. Those who save 17% of pay, reflecting a combination of employer and employee contributions, will have adequate retirement income, according to Aon Hewitt. Currently, workers contribute on average 7% to 8% of pay to their 401(k).

But even if you’re not saving that much, saving 1% more will make a big difference. Also consider signing up for auto escalation if your plan has that option.

Second, seek out advice either from within or outside the plan. A recent Aon Hewitt and Financial Engines study, for instance, showed that employees who take advantage of investment help can increase returns by as much as 2% or 3%. And Aon Hewitt’s Real Deal study shows that just a 1% difference in future return on assets can increase retirement nest eggs by two times pay. If you can’t or don’t want to use an adviser, consider the need to invest wisely. Don’t, for instance, invest in both target date funds and other funds that might negate your efforts to allocate your assets properly.

Third, retire later. Aon Hewitt’s Real Deal research analysis shows that deferring retirement to age 67 allows almost 50% of employees to have an adequate retirement vs. 29% of employees are able to have an adequate retirement when retiring at 65.

And fourth, consider carefully how you plan to draw down your assets in retirement. Aon Hewitt reports that a “retiree self-managing the distribution of their retirement assets will likely need to plan for a period longer than the average life expectancy or they will face a 50% risk of running out of money.”

To cut the risk from 50% to only 20%, Aon Hewitt reports that an employee must save an additional 2.4 times pay, which would cover roughly six additional years in retirement.

And fifth, consider a lower standard of living in retirement.

Other factors to consider

As with all things having to do with retirement planning, much depends on your income. For instance, workers will need to replace on average 85.1% of their pre-retirement income retirement. But that ratio does vary based on the amount of your pre-retirement income, according to Aon Hewitt.

Income replacement ratio: For instance, those who need $30,000 will need to replace 98% of their pre-retirement income in retirement (42.6% of which will come from Social Security, while 57.3% will come from other sources); while those who need $50,000 to $99,999 will need to replace 83.3% of final pay (38.5% of which will come from Social Security and the remainder from other sources); and those with pay of $150,000 of more will need to replace 84.2% pre pre-retirement income (15.7% of which will come from Social Security and the remainder from other sources).

Social Security: Another factor to consider is this: Social Security represents on average 4.9 times pay for the average worker, but in reality is provides anywhere from 2.3 times pay for those with income of $150,00 or more to 7.2 times pay for those with income of under $30,000. And the amount could represent anywhere from less than 25% to almost 50% of total projected needs for employees at various income levels.


2013-12-29 chart

Health care: On average, an employee needs about 4.5 times pay at retirement to pay for unsubsidized retiree medical coverage, or close to 30% of total needs, according to Aon Hewitt. That amount, by the way, is roughly the value of one’s income from Social Security. But Aon Hewitt reports that the impact of retiree medical on retirement needs varies significantly across the population based on pay and age, with the additional medical cost in retirement adding more to lower-income employees’ retirement needs than it does to higher-income employees’ needs.

Retirement risks: The other factors that influence whether or not you might have a shortfall or surplus in your nest egg and how large that shortfall or surplus might be have to do with investment risk, longevity risk, inflation risk, your retirement age, and your savings. So, for instance, Aon Hewitt’s baseline scenario assumed a 7% pre-retirement and 5.5% post-retirement annual return. But if returns are even 1% less, the short fall rises from 2.2 times pay to 4.3 times pay.

In addition, Aon Hewitt’s baseline scenario assumes an employee has adequate retirement income when they have enough retirement resources to last for an average lifetime—an age in the high 80s, at the 50th percentile of life expectancy. But if you increase the baseline to the 80th percentile of life expectancy, the shortfall rises from 2.2 times pay to 4.6. And the same holds true for inflation. If you increase the baseline scenario used, 3%, to 4%, the shortfall rises from 2.2 times pay to 4.7.

What to make of all this? In short, this: Crunch the numbers to determine if you have 11 times your final pay set aside for retirement. If not, do what you can to get there.

Robert Powell is editor of Retirement Weekly, published by MarketWatch.  Learn more about Retirement Weekly here.  Follow his tweets at RJPIII.  Got questions about retirement? Get answers. Email rpowell@marketwatch.com.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Chained CPI Could Mean Big Social Security Cuts in Long Term

In order to stem the growing deficit and potentially create a more accurate cost-of-living adjustment (COLA) calculation, many congressional representatives have promoted use of the so-called “chained” consumer price index (CPI).

Unlike the current CPI, the chained CPI accounts not only for price increases, but also for the substitutions consumers make based on those increases.

“For example, if beef prices are increasing, the chained CPI assumes that to some extent, consumers will switch to chicken and use comparable goods to stave off increases,” said James Osborne, president of Bason Asset Management. “The end result is that there would be a smaller COLA due to a lower calculated rate of inflation.”

Of course, a consistently lower COLA would lead to lower annual increases in Social Security benefits, and the AARP is lobbying to prevent the change. In a letter to the Ways and Means Committee, the organization stated that “Despite claims to the contrary, the chained CPI is not a more accurate measure of inflation, especially for Social Security COLAs. In fact, it is even less accurate than the current formula.”

Even the current COLA calculation, which is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, doesn’t accurately reflect the needs and spending habits of retirees, the long-term disabled and other Social Security recipients, according to AARP. While the prices of food and other common consumer goods are roughly in line with inflation, health care and long-term care costs have risen far faster, and seem to be rising still.

While some proponents of the chained CPI argue that it is a more accurate means of gauging inflation, cutting the deficit seems to be Congress’ primary incentive for the change. “If you’re Congress, the purpose of switching to the chained CPI is explicitly to slow the growth of benefits,” said Osborne. “It’s not really an issue of accuracy, it’s a budgetary move.”

Despite the AARP backlash, the chained CPI may also be one of the most politically feasible measures for entitlement-related spending cuts. “If Congress is looking for long-term ways to reduce benefit outlays, this is a politically easy thing to do, in part because nobody understands it, and in part because it’s a long-term game,” Osborne said. Though 87% of AARP poll respondents said that Social Security benefits should not be reduced, the gradual effects of a CPI change will likely garner less outcry than a retirement age increase or additional taxes on benefits.

As the AARP was quick to point to out, the chained CPI would most negatively affect long-term Social Security recipients. “Although many have attempted to characterize the chained CPI as a minor tweak, it is in fact a significant benefit cut that snowballs over time,” AARP stated in its letter. A recipient who started collecting $1,100 per month at age 65, a 0.3% annual cut in the COLA would lead to $56 monthly reduction at age 80 — a significant amount for a family depending on the program for most or all of their retirement income, according to AARP.

Osborne agreed, saying “It’s definitely going to be a compounding, exponential change. Nobody is going to tell the difference between a 2% and a 1.7% COLA in a year or two, but if you compound those numbers out over 20 years, it does become more substantial.” While the chained CPI may not affect those already late in retirement, it could significantly affect the degree to which soon-to-be retirees can depend on Social Security.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Health Care a Critical Part of Retirement Strategy

High angle view of a female nurse filling an injection


When it comes to retirement planning, a majority of clients consider health care coverage to be a critical part of their overall strategy. But most say they have limited understanding of health care issues today, and only a small minority understand the importance of long term care protection. Those are among the findings of a new research study entitled “2013 Retirement Planning Study,” sponsored by Nationwide Financial and conducted by Summit Professional Networks and ThinkAdvisor.

The study is based on the responses of 1,016 certified financial planners, who participated in an online survey in July. The purpose of the survey was to provide an understanding of retirement planning among financial advisors: the level of understanding among clients about retirement options; the level of preparedness for retirement among those clients; plans among clients on when to retire and when to begin collecting Social Security; and how retirement planners best keep up on the information they need to advise clients.

The good news from the survey is that while most clients have very limited knowledge about the things that will impact them, they are open to ideas. That is good news for retirement planners, who will find a very receptive audience to the advice they can dispense.

It comes as no surprise that health care scored as such an important, and misunderstood, issue by clients. The health care industry and insurance industry are undergoing dramatic change. Every week sees new headlines and news stories about the Affordable Care Act that seem to reverse the previous reports. And no one seems to know where it is all really heading.

The result is that health care is front and center on the minds of soon-to-be retirees and retirement planners alike.

According to the study, 57 percent of financial advisors surveyed say that a majority of their clients are including plans to pay for health care, including Medicare, as part of their retirement planning. But health care is the one area where clients say they have the least knowledge among several top retirement issues. The other top topics surveyed: planning for longevity, spousal protection, Social Security, and long term care.

Asked how well clients understand health care issues that impact them, 57 percent of advisors said clients are “somewhat knowledgeable”; 21 percent said “knowledgeable”; and 3 percent said “very knowledgeable”.

Clearly health care is one area where retirement planners really need to focus. That is especially true in light of the pending Affordable Care Act which will take effect on January 1, 2014. There has been a great deal of public confusion over what the Affordable Care Act means for currently insured Americans as well as the soon-to-be insured. And no one seems quite sure if it will impact Medicare, or if it will drive up health care costs overall.

The result is that “there is a lot less confidence in advising on health care,” said Stephen Haidt, CEO of Retirement Advisors Inc., in Mobile, AL. “Clients expect a lot more precision than we can provide. How do you predict these costs?”

Haidt’s view is confirmed in the survey data. Only 28 percent of responding retirement planners said they feel very prepared to develop strategies for their clients to pay for health care. Even worse, only 17 percent said they feel very prepared to help clients estimate what their client’s health care costs are likely to be.

While Americans can take early retirement at age 62, most retirement planners (57 percent) say their clients for the most part won’t. A larger majority (77 percent) say their clients also plan to spend the same or less in retirement.

Americans are also keenly aware they are living longer, and that is reflected in the survey data. After health care, the second priority cited by planners as very important to their clients was planning for longevity (cited by 42 percent), followed by spousal protection (cited by 39 percent). Social Security dropped to 29 percent, and long term care followed with 14 percent.

“A lot of people have a little understanding of each, but not how they all fit together,” Haidt said.

The one topic that retirement planners feel most comfortable advising their clients is on the topic of Social Security. Nearly half of survey respondents said they feel “very prepared” to discuss the topic with their clients.

That isn’t surprising, according to Haidt. “People are less afraid about what’s going to happen to Social Security. People near retirement aren’t concerned. They know there is nothing in the works to change it right now,” he said.

While younger generations may worry if Social Security will be available to them, older adults for the most part are not, the survey reveals. Eighty-one percent of advisors said their clients are counting on Social Security being part of their retirement portfolio; and only 26 percent of advisors said their clients expect to see reduced Social Security payments in the future.

The other key findings of the survey centered on how retirement planners obtain information they need to best advise their clients.

Most importantly, advisors would like to find better ways to communicate the importance of various retirement options. This is especially true with health care and long term care, the two issues which clients say they feel the least knowledgeable.

Despite the reliance on digital resources in the workplace today, the largest percentage of advisors said they still preferred printed communication from financial services providers (cited by 32 percent to 36 percent, depending on the topic at hand). That is followed by financial service provider websites (cited by 26 percent to 30 percent).

The least popular sources for retirement information overall are media websites (cited by 12 percent to 17 percent). Despite that, news sources (either print or online) are the most popular sources for information on Social Security benefits, programs, and changes, or for information on health care issues.

When it comes to clients, there is no substitute for face-to-face communication, Haidt said. “Clients don’t want retirement planners to just throw information at them, and leave it up to them to figure it all out.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Congressional Committee Addresses ‘Retirement Crisis’

depressed man counting pennies from retirement fund


Experts on Retirement Income Planning suggest that one of the greatest services that retirement planners can do for their clients is to advise them to delay receiving Social Security benefits until beyond age 62, according to recent testimony before the Congressional Special Committee on Aging.

Addressing what it calls a “retirement crisis,” the Special Committee on Aging met recently to hear testimony on the “State of the American Senior: The Changing Landscape for Baby Boomers.” The meeting was led by Chairman Bill Nelson (D-FL) and Ranking Member Susan Collins (R-ME).

The special hearing was called to discuss the current plight of the Baby Boomer generation as it reaches retirement age. For the first time since the Great Depression, a majority of Americans are said to be approaching retirement less financially secure than their parents.

Making matters worse, the average retiree today carries more debt heading into retirement than a generation ago. And they lack pension benefits or retirement savings to afford a comfortable living in retirement.

“Far too many American seniors struggle to get by and have real reason to fear they will outlive their savings,” Senator Collins said. “Nationally, one in four retired Americans have no source of income beyond Social Security—in Maine, that number is one in three—and four in 10 rely on that vital program for 90 percent of their retirement income. Bear in mind that Social Security provides an average benefit of just $1,230 per month. It is hard to imagine stretching those dollars far enough to pay the bills,” she said.

That message was reinforced by testimony by one of the speakers at the hearing. Sixty-three year-old Venice, FL resident Joanne Jacobsen said she had always assumed her promised pension and health benefits would be sufficient for her in retirement. But then her benefits were all but eliminated by her long-term employer.

Jacobsen told the hearing that faced with little money and no health insurance; she was forced to go back to work to make ends meet.

Her story is far too common, Collins said, as a majority of Baby Boomers are ill-prepared to financially survive in retirement. There are several factors at work, from changes in pension plans, to changes in healthcare reimbursements, to impacts on personal savings and home values from the recent Great Recession, as it is being known.

Gone are the days when greying Americans could cling to the belief that they would be well-cared for in retirement.

“We Boomer face a much different future,” Olivia S. Mitchell told the hearing participants. Mitchell is a business professor at the Wharton School and executive director of Wharton’s Pension Research Council. “We worry that Social Security and Medicare, as well as the disability insurance system, is fragile. Few of us have retiree medical coverage and traditional defined benefit pensions.

“Some of us with defined contribution pensions have not saved enough, nor are we converting our assets into longevity-protected income streams so as to avoid outliving our saving,” Mitchell said. “Interest rates are so low that holding TIPS is a losing proposition. With longer lifespans in the offing, we very much need protection for long-term care costs, but the products aren’t widely available or affordable. And many more Boomers are in debt than we have seen in generations.”

Mitchell provided considerable detail on why retirees carry more debt today, what the sources of the debt are, and the impact it has on the broader economy. She also stressed the need for more education to help consumers navigate these turbulent waters.

“Boomers could also do better with more access to financial advice, which can generate potentially important rewards in the form of lower debt for those nearing retirement,” Mitchell said. “They also need more information on the benefits of delaying retirement; indeed, many have come to this conclusion on their own.”

Most importantly, “deferring Social Security claiming produces a much higher retirement income for many: for instance, delaying claiming benefits from age 62 to 70 can mean an additional 76% more in monthly payments,” Mitchell said.

Next to Social Security, the other key area for retirement assets of course are benefit pension plans. But 401(k) plans have fallen short of providing the same value as the retirement plans of a generation ago, according to Richard W. Johnson, director of the Program on Retirement Policy at The Urban Institute.

Johnson told hearing participants that 401(k) plans generate substantial retirement income only if the individual makes significant contributions to the plan each pay period, invests wisely, and doesn’t touch funds in the account before retirement. Based on current figures, Johnson said the average individual with a 401(k) plan can expect to receive only $500 per month in retirement.

To help seniors be better prepared for retirement, Johnson urged Congress to consider four policy actions:

  • Safeguarding incomes for the most vulnerable seniors, meaning those with limited incomes and resources.
  • Protecting seniors from high out-of-pocket health and long-term care costs, including the creation of a program to help families finance long-term care.
  • Encouraging lifetime income, by considering reforms that make annuities more attractive and would increase public confidence in them.
  • Promoting work at older ages, including the encouragement of flexible work schedules by employers, and possibly even the raising of the federal retirement age to 70.

However, there are some encouraging changes in today’s working generation, according to Johnson. The most obvious is that more women are working and they are earning more than previous generations. That increases household income, and enables women to earn Social Security credits and 401(k) earnings on their own.

Americans are also healthier overall than prior generations, work longer careers, and have the opportunity to save more for retirement—if they do so wisely, Johnson said.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®