This question is one that financial planners want us to focus upon every day in their quest to increase our savings rates and their assets under management.  We have previously reported on this subject in earlier blogs but one of the leading retirement savings managers, Fidelity Investments, published its findings on this subject last month.  The story was the subject an amusingly contentious video clip posted on October 25 on MSN in its “Money” column.

Fidelity should have some knowledge on this subject.  They manage 12,000,000 retirement accounts.  The average balance is just over $70,000.  But as with any prognostication, estimating costs decades ahead can be a frightening subject for any economist.

 

Fidelity’s conclusion as to required savings rates are expressed in terms of annual earnings. Their report concludes that by age 35 your savings for retirement should equal your salary at that time. Thus, if you are making $70,000 a year, by your 35th birthday you should have $75,000 invested.  But the number climbs precipitously after that:  For our discussion let’s keep the salary fixed at $70,000.

 

Age                         Salary                     Salary multiple     Target Retirement Account Balance

45                           70,000                   3x                                            $210,000

55                           70,000                   5x                                            $350,000

67                           70,000                   8x                                            $560,000

 

Fidelity assumes that their deposits will grow long term at the rate of 5.5%.  The model is built upon the concept that a 25 year old would invest 6% of his earning and increase it by 1% per year until the rate reaches 12%.  A 3% employer match is also assumed. Of course the 5.5% return is no more guaranteed than the cost of health insurance at age 67 can be estimated.

T. Rowe Price has issued a similar model but it concludes that a retiree at 67 will need 12x final salary or $840,000.

 

These targets can be helpful as a benchmark.  But as we have stated in the past, retirement is not only a function of saving but formulating what your lifestyle will be once you have retired.

Most financial planners say that your expenses in retirement will be different but only 20% less than they were while you were working.  We have recently seen a spate of clients nearing retirement who have undertaken major debt to help a child through graduate school or some other seemingly worthy enterprise.  This has prevented retirement savings or even worse; resulted in huge obligations that retirees really won’t be able to pay off once they leave the workforce.  It is one thing to profess that you will work until you drop.  But, many of us don’t seem to realize that health problems could force retirement upon us.

In June of this year the Department of Agriculture published its annual report on the cost of raising a child in the United States.  These studies form the basis for the quadrennial changes in support guidelines throughout the US.  In 2011 the average cost of raising a child increased 3.5% over 2010.  The data show that for the average American family having a child in 2011 the cost of raising that child in today’s dollars will be $234,000 or just over $13,000 per annum.  This is the average for Americans earning $60-103,000.  In constant dollars (which is to say on an inflation adjusted basis) the cost of raising a child has increased 18% since these studies were first compiled in 1960. Families earning more than that actually spent almost $400,000 on the same enterprise, a difference of 40%.

 

The report provides information broken down regionally and by cost category.  The Northeastern US is the most expensive region in the United States.  The highest component of that cost is housing.  It absorbs 30% of the overall cost of raising a child.  Child care and education is the next highest category, constituting 18% of combined cost.  Food costs are 16%.

 

The full report is available on line at  www.cnpp.usda.gov.