The Weekend Edition of the Wall Street Journal on February 19-20 reported on something most of us already knew: Americans are not saving enough for retirement. The proposition is old but the data is new and, therefore, worthy of attention.
Why is this germane to a series on Separation and Divorce? That’s easy. In divorce we divide retirement savings that a couple has accumulated during the marriage. In many instances the savings for retirement were calibrated based upon the principle that two live almost as cheaply as one. But when the two go their separate ways, the economies of scale go out the door with them. That means re-thinking retirement plans in realistic ways.
The Journal’s research comes from several sources including Boston College’s Retirement Research Institute. Roughly 60% of Americans approaching retirement have 401(k) plans. Almost all Americans are eligible for some form of social security payment. These two devices are the engines of retirement income. The Boston College data shows that households headed by folks ages 60-62 with 401(k) type plans have median income of $87,700 in 2009. The benchmark of most financial planners is that in retirement you will need 85% of your pre-retirement income to enjoy a comfortable lifestyle. Eighty-five percent of $87,700 is $74,500 per annum or just over $6,000 a month. For these median Americans social security will provide about $35,000 in income. So the “gap” between the income target and the social security benefit is about $39,500, or $3,300 a month. That’s where retirement savings on the individual’s part comes in. The typical 401(k) for our near retirement couple is averaging $150,000. New York Life Insurance would suggest that the balance be funded with a fixed income annuity. An annuity through NY Life, however, throws off only $9,000 in income, or one-quarter of what we need based on current returns. To get the income up to $3,300 with a quality annuity would require an investment base of $630,000.
About half of those on the cusp of retirement also have defined benefit retirement plans. These plans are a form of annuity themselves and the typical retiree with a defined benefit plan can bank on $26,500 a year or roughly $2,200 a month upon retirement. For those folks the shortfall that must be made up by savings is only $13,000 a year.
All Americans over 30 years of age should be looking at how these numbers affect them. Admittedly young people view retirement as someone else’s problem. But the longer retirement contributions are ignored, the more implausible a sound retirement becomes because the funds do not have enough time to build value through investment. The starting point is to assess what is projected to come from social security. From there on, it is mostly going to be individual retirement contributions that will make the difference as defined benefit plans paying out monthly stipends continue to evaporate from the private sector.
Vanguard Group has recently increased what it deems to be the model for retirement savings from 9-12% of income to 12-15%. This means that couples with household income of $100,000 a year should be funding retirement savings at the rate of $1,000-1,200 a month.
As we noted at the outset, reassessment is required when a couple divides their retirement and doubles their expenses by moving from one household to two. Commonly the impact is to defer retirement and scale back lifestyle expectations when it does occur. This is, for most, a price of divorce that cannot be avoided.
Bear in mind, the Journal does not discuss this, but we counsel clients to think carefully about what their expenses will be going into retirement. The conventional wisdom is that living expenses constitute 85% of pre-retirement income. However, upon retirement two large pieces of modern household budgets often change dramatically. People who take on a 30 year mortgage at ages 30-35 should have satisfied that mortgage by the time they retire. The home mortgage is commonly the largest single household expense. The second largest is health insurance and 65 is the age when Americans become Medicare eligible. Most of us will buy a supplemental policy at age 65, but we can hope that this coverage will be less expensive than the private plans we now pay to maintain.
The other thing to be learned from the Journal article is to invest conservatively. The sad stories recounted there frequently involved folks who “took a chance” on investments calculated to make them wealthy rather than secure a retirement. As most of us who were invested in 2008 learned, many of the high flying investments in real estate or start up companies crashed and burned in the last recession. Sadly, that money is not coming back for those who are the vanguard of the baby-boom retirees.