You can’t set your clock by them, but they’re very predictable.
I’m talking about the relentless supply of surveys that show us we’re woefully unprepared for retirement. That we don’t save enough money. That we invest it the wrong way. In the future, the surveys intimate, there will be only two kinds of people in the world. Those who are mindlessly rich. And those who eat cat food.
If we don’t save and invest more, lots more, the surveys say, we are doomed.
I beg to differ.
Perhaps we should consider the source of these surveys. Most come from well meaning mutual fund companies, helpful insurance companies, and thoughtful banks— institutions whose stock in trade is our savings. Institutions whose source of income, profits, and management compensation, is our savings. It’s just possible they may not be getting enough of our savings to meet THEIR goals but we’ll meet ours.
Some rude questions: How do these surveys check out with reality? How much retirement income will we need? And where will it come from?
Let’s start with income. Every three years the Center for Risk Management and Insurance Research at Georgia State University does an examination of the income required in retirement. They do this by taking pre-retirement income and subtracting savings, taxes, work related expenses, and changes in consumption in retirement. Then they recalculate taxes based on retirement consumption and come up with an income replacement percentage. They do this for different income levels and different types of households.
Using consumer expenditure surveys, project researcher Bruce Palmer found that a $50,000 a year married worker cut spending in retirement by $2,311, had been saving 6.5 percent of income, and enjoyed a radical cut in income taxes upon retirement. The worker, for instance, no longer paid $3,825 in employment taxes and saw his Federal income tax bill cut from $5,670 to $156. As a result, the couple only needed to replace about 69 percent of its pre-retirement income to maintain their standard of living.
The table below shows the replacement calculations for a single earner married couple. The earner is 65, the spouse is 62. The adjustment for savings ranges from a low of 5.2 percent of income for the $20,000 family to 6.9 percent for the $90,000 family. The amount of income to be replaced by a pension or private savings will be somewhat higher for a single earner. It will lower for a single earner couple where both are the same age. It will also be lower for a dual earner couple.
Income Replacement Rations for One Earner Families
| Pre-retirement Income | Retirement Income | Retirement as % Pre Retirement | Social Security | Remaining Income To Be Replaced | As Percent |
| $20,000 | $16,753 | 84% | $12,342 (62%) | $4,411 | 22% |
| $25,000 | $20,061 | 80 | $14,322 (57%) | $5,739 | 23 |
| $30,000 | $23,158 | 77 | $16,319 (54%) | $6,839 | 23 |
| $40,000 | $28,873 | 72 | $19,305 (48%) | $9,568 | 24 |
| $50,000 | $34,483 | 69 | $20,444 (41%) | $14,039 | 28 |
| $60,000 | $40,390 | 67 | $21,384 (36%) | $19,006 | 32 |
| $70,000 | $46,923 | 67 | $21,929 (31%) | $24,994 | 36 |
| $80,000 | $54,651 | 68 | $21,962 (27%) | $32,689 | 41 |
| $90,000 | $64,066 | 71 | $21,995 (24%) | $42,071 | 47 |
Source: Georgia State University/RETIRE Project
About 90 percent of all workers earn less than the Social Security Wage Base Maximum, $68,400 for 1998. So for about 90 percent of all workers, the real replacement income gap ranges from a low of 22 percent to a high of 36 percent. (Whether Social Security will deliver is subject to debate but that’s an entirely different issue.)
Query: How do private pensions and personal savings measure up to filling that gap?
Private pensions. For the minority of workers covered by a traditional corporate pension plan, the retirement income gap can be filled simply by having a stable job history. With a typical pension providing about 1.25 percent of final salary per year of service, 18 years will fill the 22 percent gap for the $20,000 worker and 29 years will fill the gap for the $70,000 worker.
That’s a lot of years, to be sure, but millions of workers do it and any period of work long enough to vest will contribute retirement income. A worker who starts his last job at age 50 and works to age 66, for instance, will replace 20 percent of income from a typical corporate pension.
Personal Savings. The most common savings vehicle in use today is the tax deferred 401k plan. In a typical plan, the employer will match your savings fifty cents on the dollar up to about six percent of payroll. In other words, if you save six percent, your effective savings rate is 9 percent. Invested at the long term return on common stocks, you’ll have enough to replace 36 percent of income in about 25 years. You’ll have enough to make the 22 percent gap in 20 years.
To be sure, 20 or 25 years is a long time… but it also means that a person who never saved a dime before age 40 could fulfill a savings goal.
Note that I’ve made no mention of other options that have been subjects in this column— like moving to a lower cost area, trading down in houses, or just plain spending less money.
Does all this mean you should pay no attention to the endless exhortations to save?
Not at all. It needs to be done.
But next time you see one of those surveys, salt it well.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Pixabay
(c) A. M. Universal, 1998