Time to
Get Real
by Penelope Wang
November 9,
2007
A
lot of what you think you know about saving for retirement is
simply a myth. Before you can consider yourself solidly on track
to financial freedom, you have to get a few things straight.
Ask
yourself this question: Is your plan to turn whatever retirement
dream you have into reality firmly grounded in careful analysis
and practical planning? Or is it a bit more vague? When you start
to think seriously about retirement, you come across plenty of
widely held beliefs: You're in trouble without a pension; your
home can be your security blanket if all else fails; and according
to one widely reported survey, you are more likely to see a UFO
than to collect Social Security. Sure, you can find a grain of
truth in all such folk wisdom. But accept every truism and you're
plotting a course to retirement with bad directions. Challenge
a few common myths, and more often than not you'll find that the
reality is more reassuring than you'd expect. And it's certainly
more useful. Before you take another step toward your retirement,
get real about what it takes to get where you want to go.
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MYTH |
| |
If
you can manage to save a million dollars, you've made it |
A
million dollars has long been the retirement portfolio gold standard,
and why not? That's a rich sum. But let's get the bad news out
of the way quickly. If you earn six figures and have no intention
of living on an austerity budget when you stop working, you may
need far more than $1 million to support yourself for the rest
of your life. The reason $1 million isn't all it was once cracked
up to be: As a rule of thumb, you should plan to withdraw no more
than 4% of your portfolio in your first year of retirement—otherwise
you risk running out of money too soon. You can nudge up your
withdrawals slightly each year for inflation. So if you want an
annual income of $80,000—the retirement inflow needed to
maintain the lifestyle of a worker earning $100,000—and
you and your spouse will collect $20,000 or so a year in Social
Security benefits, $60,000 will have to come from your own savings.
At a 4% withdrawal rate, that works out to a nest egg of roughly
$1.5 million.
Of
course, that's just a ballpark figure. With a pension or part-time
work or more modest expectations, you can get by with much less
than seven figures. The only number that really counts is the
number you personally need to save based on your goals and resources.
So start figuring. Use the retirement planner at cnnmoney.com/tools
to find out whether you're on track. Update these calculations
every few years or whenever you have a major lifestyle upgrade.
As you draw closer to the finish line, this exercise will give
you an increasingly accurate picture of your target, million dollars
or not.
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MYTH |
| |
Without
help from a pension, you have zero chance of retiring well |
It's
true that baby boomers will get far less financial help from pensions
than their parents did. Seeking to cut the cost of providing retirement
benefits, more and more companies are dropping or freezing their
traditional plans—the ones that your boss paid for, the
ones that gave you a guaranteed monthly income for the rest of
your life—leaving you with retirement accounts like 401(k)s
that you have to fund and manage. In 2005 only one in 10 private-sector
employees was covered solely by a defined-benefit plan, compared
with 37% in 1985, while the percentage of employees with 401(k)
plans jumped to 63% from 28%. Without a pension you lose the prospect
of a predictable lifetime paycheck. That's the story, anyway.
But
the truth is, the defined-benefit pension was never a fabulous
deal for most workers. Because the traditional pension is designed
to reward longtime employees, the size of the pension depended
in large part on how long you stayed with your employer. So if
you switched jobs a few times during your career, as most people
do, you lost most of the benefit. According to the Employee Benefits
Research Institute (EBRI), last year the average annual pension
payout for those age 65 and older came to just $10,902.
When
held up against good old pensions, the 401(k) tends to get a bum
rap. Because it's portable, a 401(k) allows you to have a normal,
21st-century flexible career and still put away enough to fund
a more comfortable retirement. And if it's that "check a
month for life" feeling you want, it's a simple matter to
convert your 401(k) savings into a pension-like income stream.
WHO
SAYS YOU NEED A BIG INCOME TO BUILD A BIG NEST EGG?
BILL SCOTT, 41
•
With planning, discipline and a little ingenuity, Bill Scott
has built up retirement savings and real estate equity worth
about $800,000 over the past 20 years. At the same time,
the Alexandria, Va. single father hasn't neglected college
funding for his eight- and 12-year-old daughters—both
have 529 accounts worth $25,000.
How
did he do it? When he joined the Marines after two years
of college, Scott started saving $100 a month for education,
thinking he'd eventually return to civilian life and finish
school. He ended up staying in the Marines, but he didn't
stop saving. "I never missed the extra money because
I never let myself have it," Scott says. "As I
had more, I increased the amount I saved."
Still,
Scott feared that a master sergeant's pension and a small
nest egg weren't enough to retire on. So seven years ago,
he started buying properties to rehab and rent out. He's
now pulling in around $5,000 a month in rent. Being a landlord
on the side isn't for everyone, but it's helped Scott fund
his retirement—and his daughters' education. "You
have to be creative," Scott says. "The biggest
thing is to have a realistic goal and then find out how
to achieve it." —ASA FITCH |
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