How Much Money Do You Need to Retire?
A multi-billion dollar industry prospers by trying to answer this question. But according to retirement experts, whatever formula you use, it almost always takes careful planning and decades of working and saving to achieve retirement goals. Thanks to retirement annuities, a stellar 401(k)-type savings plan and continued health insurance, long-term federal employees are among those best prepared for post-employment life. A lot of others, however, are not. “Broadly, we see a one-third, one-third, onethird division” among workers approaching retirement age, says Jean Young, senior research analyst at the Vanguard mutual fund company’s Center for Retirement Research. That is, only about one third of workers reach retirement age with enough to retire comfortably. Another third “can get there if they make changes in behavior that are doable,” Young says. Key among the needed changes is saving more – perhaps 20 percent or more of their income. “And then you have a third that don’t have a shot,” Young says. Workers in that unfortunate group typically have had lower-income jobs, unsteady employment and managed to accumulate little or no savings. So they’re left with few choices: scrape by on Social Security, count on the kindness of relatives or keep working. Anthony Webb, a senior research economist at the Boston College Center for Retirement Research, sees an even bleaker picture. On average, households approaching retirement age – between 55 and 64 – have just $120,000 in retirement accounts, he says. That’s a small fraction of the amount needed for a 25- or 30year retirement. “More than half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65, which is above the current average retirement age,” and even if they tap unconventional income sources, such as a reverse mortgage on their homes, Webb writes in the latest update of the National Retirement Risk Index. 32
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“They face a number of unpalatable choices: save more, postpone retirement or accept a sizeable drop in their standard of living,” he said in an interview. The United States is not a nation of savers. The U.S. savings rate fell to 4.2 percent last November, according to the Commerce Department. That’s far less than the 10-20 percent savings rate that many retirement experts say is necessary to build the savings needed to support a comfortable life after work. The picture is brighter for many federal government employees. Generally, “a federal employee who has spent an entire career in government will have no problem reaching retirement goals,” says Tammy Flanagan, senior benefits director for the National Institute of Transition Planning, Inc. Under the older Civil Service Retirement System (CSRS), federal workers who are at least age 55 and have worked for the government at least 30 years can retire with annuity payments worth about 65 percent of the average of their highest three years of pay. Add to that money saved in the federal Thrift Savings Plan (TSP), and federal workers under CSRS can easily replace 70-80 percent of their preretirement pay, Flanagan says. Federal workers covered by the newer Federal Employees Retirement System (FERS) and who work for 35 years receive 35 percent of their highest three years of pay plus Social Security, which, depending on salary, is another 20 to 25 percent of pay. Add to that what they have saved in the TSP plus a government match of up to 5 percent, and they, too, can easily meet the income replacement goal of 70-80 percent, she says. But to earn those benefits, workers have to put in long federal careers. A generation ago, it was not unusual for people to graduate from high school or college, join the federal government and stay until retirement, Flanagan says. Today, that’s less common. “I’m running into a lot more employees who came in (to the federal government) in midcareer,” she says. It’s part of a national trend. According to