Posts tagged ‘Retirement’

October 28, 2014

Millenials expect to rely on work income during retirement

by Grace

Personal savings and income from work will become increasingly important to future retirees.

Working in retirement is likely to become even more commonplace as Generation Xers and Millennials eventually head toward their retirement years. While many of today’s retirees say they can count on Social Security and employer pensions to fund most of their retirement, future generations are far more likely to say they will need to rely primarily on personal savings and income from working during retirement (FIG 8).





Although I was initially surprised that 12% of Gen Xers and Millenials still expect pensions to fund their retirement, I realized these might represent the views of government employees, one of the few groups still covered by traditional pension plans.

And those who expect personal savings to cover retirement expenses need to start saving more.  The latest alarming news on this topic is that “middle-class people in the USA have a median of $20,000 saved for retirement, far short of the $250,000 they think they’ll need during that time of their lives”.


Work in Retirement: Myths and Motivations, Merrill Lynch with Age Wave, June 2014.

June 20, 2014

Go online to check the accuracy of your Social Security account

by Grace

Although most millennials “believe they will receive no Social Security money by the time they retire”, it is still a good idea to understand the basics of how this retirement system works.

Social Security benefits are based on your past earnings

First a summary of the earnings you had throughout your career is calculated. This measure is called the Average Indexed Monthly Earnings (AIME). Your wages for prior years are typically indexed, meaning they are adjusted to reflect inflation over the course of your career. For example, if Peggy earned $20,653 in 1990 this figure would be reflected as $43,531 in her calculation today. The higher your AIME is, the larger your benefit.

Second, a benefit formula is applied to the AIME to determine your Primary Insurance Amount (PIA). In 2014 you receive 90% of the first $816 in AIME, and 32% of AIME between $816 and $4,917, and finally 15% of AIME over $4,917.

Third, an adjustment may be made to the amount you are entitled to depending on the age at which you start benefits, the Social Security earnings test, or other factors.

Fourth, benefits for dependents and survivors are based on the worker’s PIA. For example, a spouse may get a spousal benefit of 50 % of the worker’s PIA, and a widow might get 100% of the worker’s PIA generated benefit.

More basic Social Security information is provided by Ken Tacchino at MarketWatch, including this bit that was news to me.

You can monitor your Social Security account online

From 1999 to 2011 the Social Security Administration mailed Social Security Statements to anyone who was 25 or older. In May of 2012 they stopped these automatic mailings and went online to save money. They will resume mailings every five years (ages 25, 30, 35, etc.) starting in September. However, the online statement that’s created by you in the “my Social Security” section of their website might be your best option to track retirement.

One benefit of the online Social Security Statement is that it can determine whether your earnings are accurately posted each year. Assessing this is crucial because the Social Security benefit is based on the amount you earn each year of your career. If there’s an error in posting your annual earnings, the amount of benefits you receive may be compromised. Regardless of whether your statement is online or not, the statement contains an estimate of the monthly retirement benefit you will receive at age 62, full retirement age, and age 70. Keep an eye on it and factor it into your planning.

Bottom Line: Tracking what Social Security will provide will enable you to better prepare for retirement.

I created a “my Social Security” account, and I would advise everyone to do the same as a way of monitoring the details and accuracy of potential future benefits.


Kenn Tacchino, “8 Social Security basics you need to know”, MarketWatch, June 16, 2014.

March 18, 2014

A quick way to calculate how much you’ll need for retirement

by Grace

It can be complicated to calculate how much you’ll need to save for retirement.  Here is a method that is relatively simple, and will help most people get a general idea of their needs.

Start with assuming that you will live 20 years in retirement, and then modify that number based on your health, family history, and other factors.

Then use a replacement ratio to determine the annual income you will need during your retirement years.  Use your current income or the income you expect to have during your peak earning years, and apply a percentage according to the following guidelines.

Simple lifestyle versus current; little-to-no-travel; inexpensive hobbies: 80% 
Moderate lifestyle versus current; upgrades to home and car expected; some travel and hobbies planned, but nothing lavish: 90% 
Maintain your current lifestyle: 100% 
Improved lifestyle versus current; increased travel and hobbies: 110%

If you expect to have remaining debt upon entering retirement, add 5 percent to 10 percent to your replacement ratio depending on the amounts you still owe.

Once you know your replacement ratio, use this calculation:

(current income x replacement ratio) x 20 = your retirement savings goal

For example, if you currently earn $100,000 annually and determined your replacement ratio to be 90 percent:

($100,000 x 0.90) x 20 = $1,800,000

Again, this assumes you’ll spend 20 years in retirement, so adjust accordingly if necessary.

This method is streamlined, and excludes Social Security income as well as explicit inflation assumptions.  But it serves to give most people a sense of what their retirement savings goal should be.

This method does not account for families that live well below their means.  For example, a dual-income couple may live on one income and save the rest.  For these frugal families, it would be better to substitute “living expenses” for “current income” in this calculation.

For information about two other approaches, one more simple and another more complicated, go to this article at US News Personal Finance.


November 4, 2013

The expected retirement age for today’s college graduates is 73

by Grace

College debt pushes retirement age for today’s college graduates to 73.

Having to spend “the first ten years (or more) of their careers paying off their hefty loans” will mean a postponed retirement for “debt-straddled” college graduates.

With the total amount of outstanding student debt approaching $1 trillion, the plight of debt-straddled college students is more important than ever. In the past 30 years, not only has the number of high school graduates enrolled in four-year universities increased by 11%, but college tuition has also soared over 200%. As more students attend college at a cost higher than ever before, Millennials have increasingly turned to loans to help finance their education. While much of the college debt dialogue is over immediate issues like employment and repayment, there is another glaring challenge that graduates will have to deal with for years to come: retirement.

When will students be able to retire given that many are spending the first ten years (or more) of their careers paying off their hefty loans? NerdWallet conducted a study that examined the financial profile of a typical college graduate and found that while retirement is certainly not impossible, for most it will have to wait until their early to mid 70s— over 10 years later than the current average retirement age of 61.

Starting late to save for retirement

Clearly, student debt has an impact on retirement outcomes. Currently, the average retirement age is 61. But for most of today’s college grads, the realistic retirement age will be closer to their mid-70s. Given an average life expectancy of 84, this will leave only 10-12 years for people to spend in retirement. The main reason for this is that although the median college graduate leaves with a seemingly manageable $23,300 debt load, 7% of a student’s earnings go toward yearly loan payments of $2,858 for the first ten years of his or her career. This prevents any meaningful contributions toward retirement. In fact, by the age of 33, when the typical college grad has finally paid off their standard 10-year loans, he or she can only be expected to have saved $2,466 for retirement—over $30,000 less than if the student had graduated with no debt. Even worse, the foregone savings carry a serious opportunity cost, as this money would have been earning a compounded rate of return every year until retirement. At the projected retirement age of 73, the lost savings directly attributable to student debt is $115,096, nearly 28% of total retirement savings.



Average retirement age is on the upswing.


College debt just exacerbates the trend for some people.

The college wage premium may not offset lost retirement savings.

On average, the college wage premium may offset the lost retirement savings caused by paying down student debt.  But on an individual basis, results may vary.  Any boost in income related to a college degree is highly dependent on the field of study and the student’s ability.  For example, how much of a wage premium will the C-average, ethnic studies college graduate actually receive?

Related:  The challenge of paying for college and saving for retirement at the same time (Cost of College)

June 11, 2013

Shaky retirement outlook for baby boomers unable to rely on bond income

by Grace

A financially uncertain retirement looms ahead for many baby boomers, even for the few who have managed to put away at least $1 million in savings.

A MILLION dollars isn’t what it used to be.

That’s the message of a New York Times piece detailing how millionaires may not be living the high life as retirees.

… $61,000 or $71,000 a year — the combined Social Security and cash flow from the $1 million portfolio — isn’t likely to be enough for most people who have grown accustomed to living on $150,000 or more a year….

Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income — often considered an acceptable target level.

Of course, retirees from the lower end of the wealth spectrum will be the ones dealing with more serious struggles to make ends meet.

Some reasons for the pending retirement ‘crisis’:

  • Low savings rate
  • Slump in home prices
  • “Ultralow interest rates” have drastically cut  investment income from bond portfolios

This last reason has been particularly painful for investors who have long considered bonds a low-risk vehicle that would consistently offer a minimum level of income.

For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

Suddenly, that risk-free bond portfolio is looking risky….

Interest rates are expected to rise, and the outlook suggests ongoing volatility.

bond investing is likely to remain challenging for years to come. Investors may face a double-whammy — low yields now and the prospect of significant losses as yields rise. On Friday, after the Labor Department reported that the unemployment rate edged up to 7.6 percent from 7.5 percent, yields rose further, amid uncertainty about the Fed’s intentions.

Not too many good options for baby boomers facing an underfunded retirement.

  • Spend less and save more.
  • Continue working beyond typical retirement age.
  • Consider tapping into home equity.
  • Add more stocks to an investment portfolio.

Of course, this last suggestion is not without risk.

.. adding stocks to a portfolio reduces the risk of outliving your savings. But it also increases the risk of big losses.

Some traditional advice for younger people, with a new suggestion about rethinking retirement age:

  • Save more
  • Invest in stocks
  • Live below your means
  • Get used to the idea of working longer, until age 70 or beyond.

Read more about A Bond Market Plunge That Baffles the Experts.

May 27, 2013

The challenge of paying for college and saving for retirement at the same time

by Grace

Especially for parents who had their children when they were in their 30s or later, the crunch of paying for college while trying to save for retirement can be tough to manage.  The Family CEO gives advice for families who find themselves in this situation.

Reduce other expenses to free up cash for these goals.

… It might be something big, like driving a car with high payments. Or something small, like have premium cable channels that you never watch. Big or small, eliminating some of these expenses and directing them to retirement or college savings can help you meet those goals.

I have neighbors who put their kids through college debt-free using this strategy.  Exercising great discipline, they gave up one of their cars, fancy vacations, most clothing purchases, and housecleaning services during the six years they were paying college tuition.  It’s certainly not easy, but it can be done.

Create new streams of income or boost the ones you have.

In some cases this is quite feasible – consultants can take on extra clients, teachers can tutor on the side, SAHMs can go back to paid employment.  But sometimes it’s hard to find new money, and even then the amounts are meager.  The whole family can get in the act; maybe a teen can earn spending money from a summer job.

If you need to choose one, choose retirement.

… there are multiple ways to pay for college, but no one is going to fund your retirement for you.

Since time is not on their side, older parents in particular should avoid skimping on their retirement savings.  It can be a hard decision for parents to put their needs above those of their children, but here’s one way to think about it.

It’s like putting on your oxygen mask first on an airplane. Make sure you’re taking care of yourself, so you can in turn take care of them.


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