Your Golden Years – A Pipe Dream?

by | Jun 23, 2006 | Cash Flow, Life Aspiration Planning, Weekly Column

When it comes to retirement, average Americans are suffering a major case of denial. Here’s the difference between the dream and the reality:

  • Dream: Two-thirds are relatively confident they will have enough money saved to provide for a comfortable retirement.
  • Reality: The average American approaching retirement has saved a paltry $50,000. Fewer than 25% of those turning 65 have more than $250,000 in retirement plans.
  • Dream: Most believe they can retire comfortably on half their current income.
  • Reality: Two-thirds of retirees say that they need 70 percent or more of pre-retirement income to make ends meet.
  • Dream: Two-thirds say they will have enough income in retirement to equal or exceed their pre-retirement years.
  • Reality: The same two-thirds have not calculated how much money they need to have saved to generate enough income to equal their current standard of living.
  • Dream: The majority of Americans believe they will live for 30 years in retirement.
  • Reality: For most, retirement savings will run out in seven years.

This information came from the 16th Annual Retirement Confidence Survey of 1,200 individuals, done last January by the Employee Benefit Research Institute and Mathew Greenwald & Associates.

Financial planners know that providing adequately for retirement means having an amount equal to at least 15 times your projected annual retirement income. They also know it’s foolish to think you will live on much less than your current pre-retirement income. A couple with a joint income of $50,000 a year, then, will need to have saved $750,000 by retirement age in order to replace that income for another 30 years.

There’s more bad news. Additional research done by EBRI indicates that a person who is currently 55 years old will need to save an additional $210,000, just to pay for out-of-pocket medical costs and supplemental Medicare insurance premiums. That’s a very scary number when you consider that 90% of Americans haven’t even saved over $200,000 for all retirement expenses.

Adding the $210,000 needed for medical costs to the $750,000 needed for retirement income, we get a retirement need of almost $1,000,000. And that’s in today’s dollars.

What can average Americans—those who have only saved about $50,000—do to avoid a retirement disaster? Probably not much. Many boomers are quickly approaching retirement and have almost run out of time to turn their plight around.

The first step will be to come out of denial and take action. That is far easier said than done. Most people are just not ready to hear the truth and take the painful steps necessary to cut back their lifestyle today so they can have enough tomorrow.

The second step is to run, not walk, to a financial advisor to get a calculation of how much money you need to save to replace your income.

The third step is to scale back your current standard of living until you can fully fund what you need to save for retirement. For most people, this isn’t going to be a walk in the park. It may mean taking drastic measures like downsizing your home, your car, and your lifestyle in general.

Because it will be painful, only a small percentage of Americans will be willing to do what is needed. Here is where the advice of a financial planner can be invaluable, especially if you can find one who uses the integrated approach described in my co-authored book, Conscious Finance. This can help you understand why you’ve been unable to save in the first place.

Above all, if you are among the majority who are ill-prepared for retirement, it’s time to begin doing something different. This is one area where you definitely want to be above average.

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