Saving for Retirement: Dissecting the Past and a Warning for the Future

A vast swath of baby boomers (and others, frankly) have likely made a mess of their retirement by failing to adequately save.   What have they failed to do?  To examine that and to provide a roadmap for others to follow, I’ve created an analysis that estimates the amount required to save during pre-retirement in order to have a certain annual income during retirement.

For purposes of my analysis, I have employed only three variables.  They are:

  1. Number of years of savings prior to retirement,
  2. Rate of return on investment savings before retirement, and
  3. Rate of return on investment savings after retirement.

For sake of argument, we’re dealing with a married couple who retire at age 65.  Their expected remaining life is 20 years.  However, in the event they goof and live until 105 years of age, my analysis will allow them to do that, but not a day longer.  In other words, if the couple lives to 105 (let’s hope they don’t) they will have exhausted their savings.  Also, let’s say that social security generates $25,000 of annual income for both.  I’m going to assume the couple needs $80,000 a year on which to live (such living expenses include amounts owed for federal and state income taxes).  As a result, the couple’s investment savings will need to generate $55,000 of investment income ($80,000 total income per-year minus $25,000 of social security equals $55,000 of investment income).

Here are the variables:

Years of savings: 40, 30, 20, 10
Rate of return on investment savings pre-retirement: 10%, 8%, 6%, 4%
Rate of return on investment savings post-retirement: 10%, 8%, 6%, 4%

  

Here’s how to read it:

Example A

If the rate of return on your investments during pre-retirement years is 10%, AND you’ve been saving regularly for 40 years AND the rate of return in post-retirement years is 10% THEN you need to save only $1,215 per year in order to generate $55,000 a year in post-retirement investment income, which along with social security will generate $80,000 of total post-retirement income per year. 

Example B

However, if the rate of return on your investments during pre-retirement years is only 4% AND you’ve been saving regularly for only 10 years AND the rate of return in post-retirement years is only 4% THEN you need to save $90,671 per year for ten years in order to generate $55,000 a year in post-retirement  investment income, which along with social security will generate $80,000 of total post-retirement income per year. 

Yikes!  That means if I start saving only 10 years before I retire, I may need to put away as much as $90,000 per year for 10 years just so I can live on $80,000 per year?  That’s scary.  Not to mention, it’s not as if two people can live like kings on $80,000 a year. 

And that’s the problem.  If you’re ten years from retirement and haven’t started saving, a rich, long-lost, aged spinster aunt, with you her remaining relative, better be in your future.

Please call or email if you need  assistance reading the chart.

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