Tuesday, October 07, 2008

Three Retirement Topics: Baby Boomers Delay Retirement; How My Household is Doing in Planning for Retirement; My General Advice

A recent Wall Street Journal article presents a scary, but not surprising, perspective on how well baby boomers are doing on preparing for retirement.

Kelly Greene notes that the average retirement age in the U.S. is 63. She cites that "less than one-quarter of workers age 55 and older - just 23% - have savings and investments totalling $250,000 or more... About 60% have less than $100,000."

Also noted in the article:

"According to research from T. Rowe Price... A 62 year-old with a $100,000 salary and a $500,000 nest egg will see his annual retirement income from investments and Social Security rise by 6% for every additional year he remains in the work force."

Here's the full Wall Street Journal article.

My opinion on what people should do to prepare for retirement:

(1.) Don't forget to account for the long term effects of inflation on your retirement income. Using a two to five percent after inflation return is far more realistic than using a flat 11 or 12 percent annual return.

(2.) Don't be optimistic. Plan for and prepare for the worst. Doing so, will better enable you to emerge successful, no matter what life throws at you.

(3.) Don't believe that your company or government pension is all you'll need. Many citizens are finding that their companies are either headed towards bankruptcy or already declared bankruptcy. In these cases, their pension benefits have either been drastically cut or completely vanished, especially if they had no pension but held company stock.

(4.) Don't expect to enjoy Social Security, Medicare and Medicaid benefits like those we know of today.

This weekend I ran the numbers to determine what it would take for my wife and I to retire and determined that we could both retire when I reach 49 yrs of age. I used the MSN Retirement Calculator. I assumed that:

(1.) We would be able to turn our $392k net worth into $2 million in the next 15 years through aggressive saving and conservative investments.

(2.) In addition to a projected net worth of $2 million, I would collect at least $64k per year from my military pension (in today's dollar).

(3.) Our investment portfolio would earn a 2% return after factoring in inflation.

(4.) We would live to around 93 years of age.

(5.) No social security benefits would be available.

Using these assumptions, we would have enough assets to draw about $80k per year (in today's dollars) if the Department of Defense continued to honor my pension and provided my dependent(s) and I medical benefits. Also, we would have a $850k buffer left over when we die. If the Department of Defense / U.S. Government became insolvent, we would subsist on $2 million dollars, living on half as much income ($40k per year).

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