Lots of alleged experts publish suggestions to help baby boomers crawl out of a retirement planning mess. By “mess” I am referring to a boomer taking a hard look at his or her “number” and realizing that there are probably going to be more years in retirement than there are dollars to pay for it.
Recently, Powell published a piece that was focused on the impending retirement crisis that will apply to a lot of baby boomers and how we can avoid it.
Powell begins by citing a paper written by James Poterba, an MIT professor. The paper is titled “Retirement Security in an Aging Society.” You can read it here but to save you some time, let me quote one of Poterba’s most cogent conclusions:
A significant subset of the population is unlikely to be able to sustain their standard of living in retirement without higher pre-retirement saving.
[T]he largest at risk group is those with middle incomes, for whom Social Security will not be enough to replace more than half of their income, whose accumulated savings in retirement plans and elsewhere are modest in comparison to their annual income.
This “at risk” group sounds like a lot of baby boomers who have not yet retired, doesn’t it?
The double-whammy is that today’s retirement savers are burdened by a low interest rate environment. It is so much more difficult to accumulate wealth from diligent saving now compared to the 1990’s and early 2000’s because real interest rates are so low. Similarly, expected cash flows from annuities purchased today or from a portfolio of safe bonds are also much lower.
According to a data table published by T. Rowe Price, a 60 year old baby boomer should have a current retirement nest egg equal to 10 times his or her annual salary to be on track for a secure 30 year retirement, also taking into account income from Social Security. A 65 year old would need a nest egg equivalent to 12 times their salary.
So where does this leave us? Powell and other experts he cites note that the typical 60-year old is putting away 6% of their income in a 401(k) retirement account. That is not enough.
Instead, these experts – taking into account the data noted by Poterba – suggest increasing the savings rate to somewhere between 15% – 20% of salary. That’s right – double your savings rate.
Who can do that? How do you do that?
For younger workers, the recommendation is to gradually increase your savings rate so that the impact is not felt all at once. That makes sense, particularly if you expect an increase in employment income.
But what about us older folks?
Depending on your circumstances, I see several options. One is to develop a second income source such as a part-time job (or like me becoming a blogger which provides a modest monthly income). I don’t like the part-time job option very much except for dire circumstances. On the glide path to retirement, I want to work less, not more.
A more realistic option for most is to focus on the expense side of things. Every dollar saved in monthly expenses can be put directly into retirement savings. You can make this strategy feel more real and practical by treating it as a retirement “test drive.”
When we retire on a relatively fixed income with no monthly paycheck, our attitude towards spending should change. Every dollar spent is more significant mentally and emotionally because we understand that our net worth is probably decreasing, not increasing as it should when we are employed. We can use that dollar-watching mindset to our advantage now, during the accumulation phase.
For example, if today you were living on Social Security and limited to 4% withdrawals from your retirement nest egg, how often would you be eating out compared to now? Would you be spending $100+ monthly on your cell phone? Would you subscribe to premium TV channels? Would you be regularly shopping for clothes at the mall (or would you check out the Goodwill stores, as I do)?
If you would make spending changes in 5 years when you retire, why not try them now?
Think about this: Perhaps now you are saving $12,000/year toward retirement. Consider preparing a retirement spending plan that reduces your discretionary spending by $12,000/year. Make those changes now and put the savings toward your retirement. With the same income, you have doubled your retirement savings rate. More important, you will be increasing the probability that you can enjoy retirement for 30 years and not be living in fear of poverty.
Because I deliberately re-designed my work life a few years ago, my employment income has declined from its peak years. I am fine with that because it gives me an opportunity to re-define and devote my time to other priorities. My retirement savings rate has not declined because I am spending less. Most of my decreased spending is in categories that will be less important to me when I retire. I decided to jettison a lot of that unnecessary spending now. I still buy stuff but only if I know it will bring sustained value to my life.
Read Powell’s article linked below and analyze your retirement savings rate. Can you double it?