The financial advice makes a lot of sense, but almost no Americans can say they have the kind of savings that experts advise is needed for retirement.
The October-November issue of the AARP magazine quotes Charlie Farrell, chief executive of Denver-based Northstar Investment Advisers, noting that at retirement Americans should have 10 to 12 times their final salary in savings. “Along with Social Security, this should be enough to generate 70 to 80 percent of pre-retirement income for most people,” the magazine notes.
Maybe that’s doable for high-dollar celebrities, entertainers, pro-sports superstars or executives in the top 1 percent of wage earners. But for the average Joe and Josephine Sixpack, that’s a jaw-dropping amount of money.
The magazine also advises people to scratch the old plan of saving 10 percent of their income for retirement.
“This may have worked decades ago when workers had pensions and shorter life expectancies,” AARP says, quoting Stuart Ritter, a senior financial planner at T. Rowe Price in Baltimore. “Today, 15 is the new 10.
“Workers should save at least 15 percent of their gross income — which includes any employer 401(k) match — to maintain their lifestyle in retirement.”
Ritter notes, “If you have not saved anything, however, the older you are, the more above 15 percent you need to go” such as 36 percent if people start at age 50.
Again, for the average Joe and Josephine Sixpack with everyday living expenses, that kind of savings rate is a moon-shot.
AARP also advises that people’s annual income in retirement should be 70 to 80 percent of their pre-retirement gross income. That involves subtracting 401(k) contributions, Social Security taxes, commuting and other work-related costs.
The magazine also says Americans should have three to six months worth of living expenses socked away in emergency savings that can be accessed quickly. That’s a scary thought because most Americans don’t have diddly in savings, says Mari Adams, a Boca Raton, Fla., financial planner.
Another startling bit of retirement-readiness information was that Americans should jettison the old rule of subtracting their age from 100 to determine how much they should hold in stocks. A 55-year-old then should have 45 percent of his investments in the stock market. That sounds risky considering the wild swings the stock market has taken this year, reacting to China’s economy being on the ropes and anemic U.S. corporate earnings.
But the magazine says that 45 percent stock market investments for 55-year-olds is too conservative. Because people are living longer, they will need the growth that stocks can offer to keep up with inflation and not run out of money in retirement.
In a separate article, the magazine notes that arguments over money increase with age for couples. Well, d’uh!
“Just 15 percent of 18- to 34-year-old couples said finances trigger arguments compared with 36 percent of 55- to 64-year-olds,” the magazine says.
Is it any wonder?
If that’s not enough to cause baby boomers to need a drink to calm their pre-retirement nerves, Jean Chatzky in a column quotes research from Voya Financial, saying that for 60 percent of retirees, the timing of retirement was somewhat or completely unexpected. The Employee Benefit Research Institute reports that half of workers leave jobs earlier than expected because of health issues, the need to care for a family member, job eliminations or workplace needs for skills they don’t possess.
Chatzky advises in the AARP magazine that people inventory their finances, focusing on six things — assets, debts, interest on debts, income (or cash flow), expenses and of those things people spend money on, which are essential and which can be dumped.
Baby boomers born between 1946 and 1964 who have been blindsided by “retirement” essentially have two options — spend less or earn more. “The most dramatic improvement most people can make is to downsize and to consider moving to an area with a lower cost of living,” says Tim Maurer, a financial adviser in Charleston, S.C.
That should make places like Kansas City with its lower cost of living very attractive for people who have been retired.
People also should consider going back to work at least part time.
That will likely be the road a good chunk of the more than 75 million U.S. baby boomers will take as more hit retirement age because of a self-indulged “youth” that stretched into their 50s.