Baby Boomers: Will You Have Enough to Retire?

Boomers are running out of time to get their retirement right. One mistake could mean they run out of money sometime in their 70s or 80s. Here's what they need to do.

Baby Boomers: Will You Have Enough to Retire? Photo (cc) by 401(K) 2012

The following post comes from Gary Foreman at partner site The Dollar Stretcher.

In the years before the recession, Baby Boomers believed they would retire in their mid-60s and enjoy their golden years playing golf and traveling. They planned to fund retirement with a paid-off home that kept increasing in value, private savings via 401(k) and IRAs, and Social Security, which they had been contributing to since their teens.

The burst of the housing bubble buried the first assumption. In many areas home values have dropped by 30 to 40 percent since 2008. Since the third quarter of 2007, prices have continued to fall. For boomers, that’s been a huge hit to their net worth.

Many retirement plans have also taken a hit. Depending on where the funds were invested, many have seen their account balances drop to levels not seen since the 1990s. Those who have studied the issue say that these accounts won’t be able to provide enough retirement income. Wrote The Wall Street Journal

“The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what’s needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.”

The final source of retirement income for boomers was to be Social Security. But as of 2010, the trust fund was actually paying out more than it was taking in. And the trustees expect the fund to be exhausted in 25 years, according to the government: “In the 2011 Annual Report to Congress, the Trustees announced: The projected point at which the combined Trust Funds will be exhausted comes in 2036 – one year sooner than projected last year. At that time, there will be sufficient non-interest income coming in to pay about 77 percent of scheduled benefits.”

So what’s a baby boomer to do? Now is the time to take a good hard look at your retirement plans and how realistic they are…

You should see a professional to work through all the math and different options. Much will depend on some of the estimates that you make regarding how much income you’ll need, how your investments will perform, and what inflation will be.

You can get a rough estimate on your own. Begin by estimating how much income you’ll need. Traditionally, workers were told that they’d need about 80 percent of their pre-retirement income after retirement. But your retirement lifestyle may mean you need much more or much less income. One way to estimate you needs is to start with your current expenses. Then subtract expenses that will disappear if you retire (second car, work clothes, continuing education). Then add any new expenses that would begin at retirement (extra travel to visit the grandkids, a hobby that you’ll finally have time for).

Now adjust your estimate for inflation. Suppose you felt you’d need $50,000 per year in today’s dollars, but you won’t be retiring for 12 years. If inflation were 6 percent, prices would double in 12 years, so you’d really need $100k. If inflation were 3 percent, you’d need $75k.

Next, you’ll need to estimate how much savings you’d need to create your target income. For illustration, let’s pick a nice round number and assume that you’ll want $100,000 per year. Next, you’ll need to assume how much your investments will earn each each year. For our example, let’s say 8 percent per year. Then divide your desired income by the investment earning percent. In this case, that would be $100,000 divided by 8 percent, or $1.25 million.

Again, this is just a very rough calculation, and it depends in large part upon the assumptions you made. But the point is simple: Unless you’ve saved more than most of your peers, you’re probably short of what you need for retirement.

The calculation here wasn’t meant to give you a definitive answer. That’s not possible in a short article. Rather, it was to demonstrate how important this information is – and to encourage you to meet with a professional.

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