Is $250,000 in savings enough to retire?
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A version of this post originally appeared on Portfolioist.
The Employee Benefits Research Institute has issued the 2011 Retirement Confidence Survey. And the answer is: We are not confident. This seems to be, one could argue, an acknowledgment of the obvious.
One statistic that was surprising, however: 31 percent of people surveyed said they expected they could retire comfortably on under $250,000 in savings.
That sounded incredibly low, so I reached out to Mike Piper, the author of Can I Retire? and the Oblivious Investor blog, and asked him, how crazy is that?
Piper did some extremely quick back-of-the-envelope noodling and found that while such a retiree would probably be taking more than ideal out of their savings each year, they weren’t completely off the reservation.
Here’s how he parsed the question:
According to the U.S. Census Bureau, in 2008, 24.7 percent of households earned less than $25,000. And another 10.9 percent earned between $25,000 and $35,000. So $30,000 appears to be a decent ballpark estimate of the 30th percentile for household income in the U.S. (We’re going for 30th percentile here so that it lines up with the idea that 31 percent of people estimate needing less than $250,000.)
If we go to the Social Security Administration’s “Quick Calculator” and plug in 1/1/1946 as a birthdate (such that they’re 65 now, and about to retire) and $30,000 as current earnings, we get a ballpark estimate of Social Security benefits of $10,848 per year.
If we assume the person ends up paying 7.65 percent less total tax (due to not having to pay payroll tax), that’s $2,295 in tax savings.
That leaves approximately $16,857 per year left to be satisfied by pension income, work income and withdrawals from investments. If we assume no work or pension income, that’s a withdrawal rate of 6.74 percent based on a $250,000 portfolio. [Editor's note: compared to the most common four percent rule of thumb.] Definitely a bit too high for comfort from a regular portfolio. But if the person annuitizes via a single premium immediate lifetime annuity, it’s not terribly outside the range of possibility.
Other factors that could work in the investor’s favor:
- We didn’t back out the no-longer-needed savings for retirement from the $30,000 figure.
- If the person is married, there could be spousal Social Security benefits as well. (Though exactly how this works out depends on the breakdown of the $30,000 income between the two of them.)
- The tax savings could be greater than we estimated, as income tax would likely be lower as well.
- There could be some pension or work income.
Of course, there are a whole list of factors that could work in the opposite direction. For example:
- Many investors probably wouldn’t recognize that they’d need to annuitize in that situation.
- Most investors pay far too much in investment fees, making even a four percent withdrawal rate too high for safety.
That’s certainly more upbeat than I’d thought on first blush. On the topic of retirement it’s amazing what passes for the good news these days.
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Living on less than that now and disabled. So if I HAD $250,000 for retirement it would be a breeze.
Social Security typically replaces 60% of the income for somebody earning $30k. People can (and do) live on that alone.
The big question here is whether the household in question owns their home free of mortgage, is still paying a mortgage, or is renting. After a mortgage is paid off, the cost of ownership drops by some 50%. Perhaps more, if you delay repairs or do a lot of the work yourself. It is pretty typical for the expiry of a mortgage to drop income replacement needs by 20% compared to renting.
Annuitizing the entire $250k is likely a bad move. What do you do the first time you need money for large medical bills? Borrow on a credit card? Better to keep the $250k in reserve, target a much lower withdrawal rate (perhaps 3%?), and aim to live off THAT income stream. Paying off any debt is also preferable to annuitizing savings.
It is ironic to juxtapose “need to annuitize” with a complaint that investors “pay far too much in investment fees”. You do realize that annuities are the most costly investment vehicles on the market, right? The fees built into them rival those charged by hedge funds.
I think you can pull it off if you plan carefully. First order of business needs to be addressing your medical situation by making sure you get all your Medicare enrollment requirements addressed by aligning yourself with your local Medicare office, and work with a dedicated agent / advisor. Medicare covers 80% of your medical expenses, so purchase a Medicare Supplement Plan which will cover the remaining 20%. In addition to that make sure you purchase a Medicare Part D Plan which will cover your medications, you will need that as you get older. Now, you have insured against the unknown and will not have to worry about medical catastrophic.
If you don’t own your home out right, I would rent, as that would be the best turn key for living quarters, there are a lot of choices out there. If you own your home you might want to think about a reverse mortgage, make your home work for you after all the years you paid into it. So, between a reverse mortgage, SS income, your $250K, and 100% insurance coverage, you are on your way to pulling it off, just make sure you plan your other expenses such as food and travel, and execute carefully.
Depends. We live in a relatively low cost area, and count our pennies. We always have. If you use your brain, do it yourself, and don’t get sucked into the mass consumption culture, two 40K a year jobs can make for a very comfortable life in at least the western U.S. We reached that level early in our careers, and simply banked the rest. Money was never a problem, and we still ended up owning too much ‘stuff’.
When I retired I found that my daily living cost plummeted. Forget the nonsense that comes out of the investment industry. Because I had a very large amount of my income going directly out of my paycheck to various investment options, I NEVER lived on even close to the 60% – 80% of earned income they said I would need in retirement. My commuting expense is completely gone, I pay lower taxes, I don’t have a chunk of my pay going into a 401K/457 every month, I’m very comfortable in jeans and not wearing a suit.
I’m also with TFF; annuities are a VERY bad idea given the fees in that industry. You don’t need an insurance company to do an annuity, you need a calculator and the link to Vanguard mutual funds. And actually, Vanguard now has an option to do the calculator work for you, and won’t charge you a fee.
It would be useful if Reuters would start reporting the truth on the investment industry. Social Security is not going bankrupt and is not going away, EVER. The majority of mutual funds and hedge funds will under-perform a simple low cost indexing strategy, ALWAYS. And much of the reporting and analysis on finance and investing is intending to create fear, uncertainty, and doubt in an effort to manipulate people into paying unnecessary fees.
Yeah but there are two big worries I don’t see how you get around. Health care incidents go up as you get older, and looking that far out is very scary. 2nd, inflation is very insidious, do these annuities you talk about protect from it?
Social Security is not bankrupt, but I have absolutely no doubt that it is going away. As someone born in 1965, I will be in the first wave of people to lose this “entitlement” that I have paid thousands upon thousands of dollars into in taxes.
The “temporary” cut in payroll tax this year is an obvious Trojan Horse intended to accelerate the destruction of Social Security, either by means of outright suspension of benefits or by the privatization that seems to be the most cherished ideal of the wholly-owned subsidiary of Goldman Sachs that is the United States Congress.
Think we’ve seen bloated fees and F.U.D-based mass marketing campaigns up to now? Just wait until Wall Street gets its hands on the corpse of the Social Security program.
Social Security will not go away as long as Democrats maintain enough votes to block any moves by the GOP and Tea Party to eliminate it.
The retirement ages will go up, the in come cutoff level will rise some, and some form of means testing for the very wealthy that really don’t need it are going to have to happen to keep it solvent.
Social Security is already the most solvent of all goverment programs. Revenues are down now between the current economy and a change in the workforce/retiree ratio so a little tweaking will ensure it to be covered weel into the future. The problem is that the government spent all of the money that the Social Security fund invested in government bonds and that paying them back will require borrowing or higher tax revenues. Blame that on runaway military spending and other cost control problems, but don’t blame it on Social Security.
OK I am very confused. They say it is easy to earn 8 percent in your pension plan so why is 6.74 withdrawal rate too high? You are still building money at 1.26 percent a year which means your money will last forever.
Social Security will remain solvent through the Baby Boomers’ lifetime. But Medicare will not. MEDICARE is the giant problem, not Social Security. And threeRivers is right, health care incidents go way up as you get older. So try to put aside some rainy day medical expense money, even though you have insurance now. Also, exercise, get enough sleep, and eat vegetables.
A lot of good advice here about the bloated annuities industry, thanks.
I see one major flaw with this assertion. The calculations are based on a household with annual income of $30,000. Guess what, a household with that level of income will never be able to sock away a quarter of a million dollars saved for retirement. If the working lifetime of the household was 40 years, they would have to have stored away an average of $6,250 per year into retirement savings (post-tax). That’s more than 20% of their pre-tax earnings each year for life. In short, any household that has managed to save $250,000 for retirement has spent their time living well above the $30,000 per year income level.
This would work if you are willing to live on nothing in the middle of nowhere. In the real world, you need $75k just to get by, which tells me that you need to have over $2M in the bank by the time you’re 65.
Retirement is a hopeless dream for anyone who isn’t a Baby Boomer.
Plus I am confused as the average American only has $12,000 saved for retirement not the $250,000 which seems like a huge amount of money.
Also consider half of Americans (not households) now make less than $27,000 a year. To save $250,000 dollars considering most 401k plans from 2000 to 2010 doubled in value but 2/3 of that doubling was in the form of added contributions to the 401K so the plans only earned 1/6 of it’s value over ten years of interest and starting at half way funded.
This means with $12,000 in the bank and contributing $2,700 in the bank for ten years most Americans will see their 401k funds almost quadrupole in price to a whooping $45,500 and double in another ten years to $84,853 and then not quite double to $130,0450 after 30 years far short of the $250,000 talked about here and considering 30 years of at least 5 percent inflation that $130,045 will be worth about $28,900 in today’s dollars so pretty much after ten years of saving most americans will have saved about one year’s salary. Pretty bad.
Are the United States Federal and State Gov’ts. out of control? Do you think the endless spending of the hard working taxpayers’ money, including military involvement in countries we have no business in at all especially when our country has many severe issues continuously going over looked and untouched, do you think enough is enough?
Retirement won’t even be a word for most in a few more generations. People are not paid enough wages for the many hours of their lives they dedicate to working in order to eat, sleep, and live more comfortably. And, if there is a job, a Latino is probably going to get it first.
My Grandparents have both spent their lives working hard for this country and today, as they are in their 80s, neither one of them has an extra dollar to spare for any sort of luxury. My Grandfather proudly served in Korea and the rest of his life being a community business owner. My Grandmother, whose father retired from the Army, has spent her good years working one job which was a secretary to a hospital C.E.O. Like I said, for their hard work and dedication, they have not much of anything.
We the People of the United States of America need to stand up for ourselves and push for positive, and beneficial to everyone, changes for and in this country and it has to start at the top. All politicians talk the talk but never end up walking the walk. Those same politicians are the men and women we voted in while hoping to trust their word and therefore see the changes they promised to work towards making. Every year it’s new taxes with this and that excuse in place. And, every year the same politicians are paid very well and very rarely have a complaint worth hearing when compared to the many millions of average ordinary every day people who make up the majority of this wonderful country, the same people who provide the many BILLIONS of tax dollars that continuously get misspent and wasted and never truly returned to the very people who spent a great majority of their lives working to provide those tax dollars in a trusting effort so that our country would be the best and most frugal it could be.
Who’s going to make the changes necessary? Does the Constitution even mean anything anymore? The answer is, “We the People”
(1) You are using a $30,000 HOUSEHOLD income – that means income of both spouses. That means the Social Security of the individuals will be far lower than the number you use.
And DUH>>>> a household that only makes $30000 a year is NOT going to have $250000 in savings!
(2) If a household only has $30,000 a year in income, the probability is that they DO NOT have health insurance. Jobs that pay such low wages don’t come with healthcare. All that money is going to pay living expenses.
In this state, a $30,000 household of 2 adults would pay around $4500 in payroll taxes, federal income tax and state income tax. That leaves them with $25500 a year to live on. They will have an older used car that will need ongoing repairs and shop at discount stores and garage sales.
(3) After retirement expenses include Medicare – and it is NOT cheap! They would probably go from having no health insurance to paying for Medicare. Do the math. Part B premium $110+ for new enrollees; Medigap plan to cover copays but not the Part A and B deductibles ($175) and a Medicare prescription plan (good one are $58 a month here.) That is $343 a month PER PERSON in premiums or $4116 per person a year or $8232 for a couple. Then add in the deductibles ($1100 Part A and $155 Part B) for another $1255 per person or $2510 for a couple. $10472 a year for a couple or $5371 for an individual — an they haven’t filled a single prescription and Medicare does not cover dental or vision.
Now take that $30000 a year and deduct the Medicare costs – which are 35.8% of total income. That leaves $19528 for them to live on or $1627 a month.
DO the math. Electric, heat, water, trash, one phone line, only high speed broadband and NO TV, car insurance, care repairs, gasoline, food, household supplies — call that all $1017 a month. That leaves $610 a month for everything else – clothing, haircuts, replacing the old car, dentists, glasses and eye exams,…
OOPS! We forgot housing. If they own the house (no mortgage), they will still have insurance, property taxes and upkeep. So take another $300 out of the duget for insurance and taxes….now they have $310 left for clothing, replacing the car etc etc etc.
If they don’t own the house and have mortgage payments or have to rent, they will have to drop Medicare coverage for Part B (office visits etc), Prescription coverage and, of course the Medigap as it requries they have Part B. Now they will have freed up $686 to pay for housing.
ANd the odds of a household which only earned $30000 a year having been able to buy and pay off a house is not high. SO they will have housing costs.
And that is the scenario routinely I see in my volunteer financail counseling.
This would work if you are willing to live on nothing in the middle of nowhere. In the real world, you need $75k just to get by, which tells me that you need to have over $2M in the bank by the time you’re 65.Retirement is a hopeless dream for anyone who isn’t a Baby Boomer.Posted by SkinnyPuppy
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Hmmm. lots of unreal expectations and false statements here.
(1) Only 13% of ALL workers make $75000 or more to start wtih. 50% of workers make less than $35000+/-. Join the real world where only households in the top 20% have a $75000 income. The rest live on less.
Spoiled by our parents were we? Expectations out of line with the wasy the majority live?
(2) Its not the “boomers” who had pensions and employer paid retiree healthcare in retirement. It was their parents and grandparents. In fact of the so-called boomers only those born in 1945 have reached full retirement age for Social Security. Most are still in their 50s and losing their jobs to younger workers and unable to find new jobs.
The “boomers” were the generation that started their working careers expecting to be like their parents – same job forever, pensions etc. The rules got changed on them when they were 25 -40 years old and they first learned of RIFs (reduction in force), 401KS (good luck on that for the 95% not expert in stocks) and all the rest. And of course they squandered their money on their offspring who grew up to be self-centered obnoxious brats believing themselves entitled to everything and responsible for nothing.
Projections show that 50% of booomers will only have Social Security and another 90% will depend upon it for the majority of their income. The WWII and Korean War generations (parents of the Boomers) were and are far better off as they had pensions rather than 401—oops 201 —- oops 101Ks dependent upon the whims of the stock market gambling casino.
What about inflation? Living on $30K now versus living on $30K 10 years from now is NOT the same standard of living. Inflation could increase the amount tapped out of the $250K and it would start to disappear more quickly, correct?
If you make less than $150,000 a year and have any type of dependents at all, and aren’t in perfect health for your entire life, and are under 50 years old, this article was not written for you… it’s a cute fantasy piece.
Just take a look at our economy, folks. Our higher-paying jobs have been shipped overseas or sucked out of the US via NAFTA. We have a huge standing military with salaries, free health care for life, and golden-parachute retirements. Plus we blow million-dollar Tomahawk missiles into places we have no business being. It’s guns versus butter, and it’s decision time now.
“They say it is easy to earn 8 percent in your pension plan so why is 6.74 withdrawal rate too high?”
The 6.74% withdrawal rate is what you get from the insurance companies when you buy an annuity. (Depends on age, gender, perhaps other factors, but it is in the ballpark.) It is **NOT** a good withdrawal rate, and in fact the insurance company could (if it chose) pay at that rate without ever investing in anything riskier than US Treasuries. This withdrawal rate is also not indexed for inflation, which could leave you seriously short on money if we hit a period like the 1970s.
A safer withdrawal rate is the 3% that I mentioned. If you invest sensibly in a mix of stocks and bonds (mostly stocks), you ought to be able to withdraw 3% annually and increase your draws to match inflation. (Plenty of very solid consumer companies that pay a 3% dividend.)
Not sure I would advocate a reverse mortgage. As long as you own your home free of mortgage, you have a source of equity that you can tap in an emergency. (And yes, emergencies do occasionally arise, even after retirement.) If you mortgage and annuitize everything you own, then you have NO remaining flexibility. None.
Better to live frugally (perhaps work on the side as long as you can) rather than living high on the hog for five years and ending up COMPLETELY broke.
hmmm sad to be reading this, I’m in Europe and even if retirement is a concern, it is way less a concern than what you are leaving. We have what we call pillars. First pillar is official pension based on salary and number of years working (and unemployed searching for work), it depends on country and kind of salary but let’s say that it is not so difficult to have 1000-1500 EUR per month (people working for the government can go higher than 2000 and I’m talking of net amounts here). Then comes second pillar being extra legal pension from your company (if you are lucky), this can add a 5 to 20% or a one off lump sum, then comes the third pillar which is a life insurrance that you pay monthly and is deducted from your taxes, it is again an additional 0 to +/-20% depending if you do it and for how long you have been doing it, next comes whatever you have put aside for your old days… I’m not saying retired people are rich but if planned correctly we can have a good life after work. Of course everyone is not so lucky like always… Now please stop calling us socialist while seeing in your imagination the word communist, that is really different, European countries are also based on free economy and profit making but we built it differently and it works with problems but it works, after all your model works as well but also with problems.
Where do health care costs or home care costs fit in with this? My two parents-in-law both have dementia. One has already passed on; the other can no longer keep house. My own parents, combined, have glaucoma and lupus, so the disabilities of each complement the other, but again they cannot keep their own home and need additional help. I would think an annual takeout rate for retirement expenses — especially in the years beyond age 80 — are closer to $30K per person / $50K per couple, far beyond what’s portrayed here.
It’s all relative. For someone used to earning $1 per day on the rice paddy fields of China, $250,000 may be an adrenaline rush, like one might imagine upon winning Publishers Clearing House.
On the other end, $250,000 would barely pay the yearly mortgage interest.
In between is a gray area! As one forcing myself to cut back spending to absolute necessities as an exercise for hyperinflation, lowering spending is as difficult as a weight loss and exercise regimine! Spending less is punishing, humiliating and yet gratifying when accomplished.
Unfortunately, the fat couch-potato generation entering retirement would give you a blank stare if you asked them to define “self-discipline.” What is THAT, their expression might imply… never even heard of it. You spend until you max-out your credit, stuff your face until your belly covers everything south of your waistline, and exercise is a dirty, dirty word not spoken in polite company especially in the presence of beer and potato chips.
I mean, how will some retirees of the generation entering social securityland going to keep buying junk food unless Walmart has them sling it up in a Bangladesh factory to cut costs? Retirees are in for a rude awakening!
Vote for political candidates who will work to remove the cap on Social Security. No way will I ever invest with private investment firms, because too many people have been cheated out of their retirement incomes and savings. We need a strong social Security system and NOT privatization of retirement benefits.
http://www.mm2h.gov.my
This is what my wife and I are doing. We just bought a huge house (4200 Square feet) with walled garden within commuting distance to Singapore for about 165,000$US. I have almost enough money at 25 to retire and live a peaceful life in my tropical paradise.
I advise all Americans who are throwing money in investments to really decide what your end goals are. Why scrimp and save only to live the life of a starving pensioner in the US when there is a whole world of opportunity for you?
The problem is people want to sustain upper class lifestyles through-out their retirement and that’s simply not fiscally rational.
If retired people could live within their means and stop treating it like a vacation other people should pay for, they wouldn’t be as worried about money.
Sure they put in their time working – and they deserve the money they earned during that time, plus social security and healthcare and no more.
They want extra luxury? Tough. Earn it.
retirement from college? absolutely yes!
I think how the current social security system is setup you could, however I would not want to. When I retire I want to be as worry free as possible, so I am aiming for about 2.5 million inflation adjusted dollars.
I think most people for get about the inflation adjusted.They see on a statement that an investment earned 6% on a 250k investment and they think, OK I can with draw 15k and have the same thing. However they forget the 3% inflation, which means they can only with draw $7500. The question then is what do you do if a 2009 rolls around and 6% isn’t attainable????
I have about 50 years until retirement so plenty of time.
Reasons not to retire with a low level of savings:
1) The cost of medical care is going up faster than the overall rate of inflation. As you get older and sicker your out-of-pocket medical expenses will rise.
2) If you ever need institutionalized care (e.g. due to dementia) that is several thousand dollars per month.
3) As you get older during retirement and your savings deplete your capacity to earn money to supplement those savings will decline. You will become more helpless.
4) You might live longer than average. At age 65 current life expectancy is about 18 years in the US. But what if you are in the top 25%? You could live into your early 90s. Want to spend 25+ years living off such a small pile of money?
Life really is about choices. If you choose not to save up for retirement, it’s no one’s fault but your own. You may have foolishly kept making this choice in your 20′s, 30′s, 40′s, 50′s…and if you made the wrong choices you will likely live poorly, suffer and die early. But, you knew that, right? … Anyway, ignorance is no excuse, but be sure and let your kids know so they don’t repeat it. The bottom line is, if you don’t have enough to retire, quit your bitching and moaning…no one owes you your lifestyle or life…hopefully at some level what you chose was what you really wanted, be it created lots of value and saved it or were a slacker and spent it all…and everything in between.