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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 35^th 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.

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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.

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Lawyers are not financial advisers but we do lots of real estate transactions and for most divorce clients, the largest asset in the portfolio is the family home.  So in just about every matrimonial case, there is the inevitable question.  Should we hold or is it time to fold?

It’s always good to study the data.  And the news for our region for the second quarter of 2009 is relatively good.  Prudential Fox and Roach reported the first region wide increase in housing prices in two years.  The biggest increase was in the city (6.8%) while the suburban increase was less than half that (2.7%).  There had been a sharp decrease in the first quarter of the year.  We have also weathered the storm well compared to other large cities. Philadelphia prices have declined 12% from their peak while average declines in the ten largest cities was closer to 30%.

Inventories (homes listed for sale) are leveling off and there is an increase in the rate of sale of those houses in inventory.  This has meant a reduction in the number of days it takes to sell a house.

So, does that mean the end of the downturn is over.  Even the experts a Fox & Roach hasten to note: “Those expecting a near-term return of 2005’s peak prices will be sadly disappointed.”   Within the region, the worst sales markets were Camden and South Jersey (down 10-11% in the past year) while Trenton area fared best (down 0.5%).  The Philadelphia market fell 5.31%.

While the second quarter offered an uptick in the rate of sales, it still took 20% longer to sell a home in June 2009 than it did June, 2008.  The average house sold was on the market more than three months.  If no new homes were listed, the 2,500 homes on the market would still take almost a year to clear at the current rates of sale.  That number has changed very little from last June.

Homes are not just places to dwell in.  They are an investment.  And since the collapse of the dot-com bubble of 2000 Americans have invested heavily in their homes.  We have been taught and there is data to show that homes can be a good investment.  What most of us tend to ignore is the fact that value is a moving target. And in markets like Phoenix and LasVegas, where prices have declined an average of 33% in the last 12 months the picture is especially clear.

Let’s use LasVegas as an example.  Let us say that in April you owned a house in that market in which you had equity (price $300,000 –debt of $200,000) of $100,000.  A buyer approaches you and offers you $300,000.  But you bought the house for $450,000.  So you decide to wait and turn down the offer.  Between April and the end of July, the data show that you lost another 2.6% on average.  Now suppose you took the offer and took your equity of $100,000 and put it in an S&P index fund, it would have risen to $130,000.  So your decision to hold cost you $40,000 between the loss on what you had and the money you failed to make.

Home equity is an engine of potential wealth.  We are not advocating irresponsible borrowing but home equity is trapped wealth except in times when home prices are rising. And with the inventory of homes still out there, it is going to be a long time before we see prices rise.  Bear in mind also that the increases reported earlier in this piece come at a time when interest rates are at historic lows.  As interest rates rise, price increases in homes will inevitably face the headwinds of increased interest rates.  So, if you bought at the height of the market, realize that in your quest to recover your losses, you may be foregoing the opportunity make real money in other investments.

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In case you are one of those driven under a rock by the economic news of the past few months, you may have missed the latest news.  One of Wall Street’s most prominent investment advisers appears to have walked off with $50 billion dollars in what may qualify as the largest Ponzi scheme in world history.  For once, it wasn’t the little guy that got hit.  The client list for Madoff Investment Securities included some of America’s wealthiest investors. Sadly it also included some of the charities underwritten by those investors.

So why are the divorce lawyers writing about this? Because every day we are meeting with folks who don’t understand their investments and tend to buy based on “reputation” instead of the facts. Worse, they own things like hedge funds or derivatives without knowing what these things are.  These “country club investments” (based on the locale where they tend to be sold) can and often do transform rich people to middle class in a hurry. 

The defenses we commonly hear aren’t very good.  1. My spouse handles all of this.  2. We wanted to please a customer or client.  And worst of all:  3. The returns were too good to pass up.  Ask Mr. Madoff’s clients.  Indeed, they were too good to be believed.

It is pretty common during an initial interview to ask a client about an investment only to discover that the client doesn’t know how it works. It is common to see clients who have millions in life insurance but not a penny of disability insurance.  It is not uncommon to see 80% or more of an employee’s retirement invested in the stock of the employer. Presumably, this means that the collapse of Enron could not occur again.  Until Bear Sterns and Lehman Brothers did it again in 2008.

Certainly, it must be conceded that even the blue chip securities took it on the chin in the fourth quarter of 2008. And the Lipper Indices shows that the pain was felt across the board among the mutual funds.  But there are plenty of companies that have seen 80 -90% declines in their stock prices.   Are you qualified to decide when to hold and when to fold?

There are two kinds of money in this world; gambling money and retirement money.  Investors tend to ignore the distinction. If you have made it to age 40, there is a good chance you will live to 90.  That makes for 25 years of retirement.  At 40 we see little reason why we can’t work until we are 90 if we need to.  But, ask the person who is 70 what employment options he or she has. And if you are 40 with little saved for the golden years, investments in satellite radio or Philippine gold mining are not the way to make up for your refusal to save earlier.

The corollary to this rule is that if you are married to one of these riverboat gamblers you need to realize that you may be lashed to the mast of the boat. If I save and my spouse does not, there will be only one retirement fund to live on.  And should my nonsaving spouse decide to dump me and move in with my wealthy neighbor, chances are we will be dividing my retirement savings.

So what are the rules?

1.       Save for retirement like you mean it.

2.       Make your spouse do the same as soon as realistic

3.       Find a professional to manage your retirement money.  Make certain that professional

is SIPC insured and that every aspect of the investor operation appears transparent.

4.       Challenge your professional to produce returns.

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