Self-imposed retirement delusion.

The American dream is financial independence, but we aren’t saving or planning enough for retirement. Everybody knows this, but we aren’t doing enough about it. Frankly, the gulf between what people know and what they’re doing has progressed beyond “inadequate planning,” it’s outright delusional.

How much do you need? Around 20 times your annual spending needs. That will allow you to withdraw 5% a year and still handle the bumps and bruises that markets will inevitably serve over time. Conservatively, I use 22 times my desired retirement spending needs, and that doesn’t include income from any source other than savings.

If you have a pension or fixed annuity, you can subtract that from your annual needs to do the calculation. If you’re older than 50, you can probably plan to receive the social security benefits you’ve been promised. If you’re 40 to 50, be ready to give those benefits a significant haircut. If you’re below 40, like me, don’t count on it (by the way, the more you save, the less likely you’ll be to get it).

Assuming the average John and Jane Doe need around $40,000 a year to live on, they’ll need $800,000 to retire. Americans aren’t even on a glide-path to reach that point–they’re on a different planet.

According to the Employee Benefit Research Institute’s 2010 survey, 54% of those currently working have less than $25,000 in savings and 88% have less than $250,000. Those already retired are even worse off: 56% with less than $25,000 and 88% less than $250,000.

It’s not just a matter of not having saved enough, it’s a matter of even having thought about it. Both retirees and workers are confident they have or will have enough to retire. And, this is from a group where only 46% have even tried to calculate how much they’ll need! Delusional.

How do workers and retirees expect to get by? That’s where the survey gets scary. 66% of workers expect to keep working past 65. The percent of actual retirees that work past 65? 39%. In other words, people expect to keep working past 65, but don’t–not because they don’t want or need to, but because they can’t. Why? Because they get fired, can’t find work, or, most frequently, have health issues that make working impossible.

A startling 70% of those currently working expect to continue working in retirement to pay the bills. The percent of retirees who actually manage to do this: 33%.

The average worker expects his retirement income to come from working in retirement and a pension (even though the vast majority admit they don’t have pensions and won’t because few companies offer them). Where do actual retirees get most of their retirement income? Social security.

So, most people are planning to keep working, but the data clearly shows that won’t happen for most. And, most expect to get a pension even though they don’t have one and have no clear path for getting one. The reality is that most retirees rely on social security, but only 30% of people working and 52% of those currently retired expect social security to be available. This fantasy will turn to farce, but it’s won’t be funny.

The stock market–by itself–won’t bail us out, either. Trend-line growth of 6% plus a 2% dividend yield means we should expect only 8% returns (which includes 3% inflation). But, most people won’t even get those returns because they’ll pay too much in fees and then they’ll chase performance (selling what “didn’t work” to buy what’s recently “been working”). The reality is that most people will get returns that simply match inflation.

What’s the real solution? Save more, save more, save more (which conversely means: spend less, spend less, spend less). I’m 39 and have 20% of the savings I’ll need in 26 years (assuming 65 retirement, whether I like it or not!). Assuming I can get market returns (even though I’ve beat the market by 5% on average, annually over the last 14 years), I’ll need to save 10% of my annual income to get there. I’m saving 20%. In other words, I’m not planning to get there with just enough if everything goes right, I’m assuming things won’t go right and building a margin of safety into my plan.

It’s time to drop the delusion and act. That action means saving more, spending less, investing wisely, and planning to have more than needed. The benefits are more than simply having peace of mind, it’ll be food on the table and a roof over your head when you’re too old to fix past mistakes.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Retirement prospects look poor

An article in the Wall Street Journal today highlighted that those in or preparing for retirement are less confident than ever.

Only 13% of workers say they are very confident about having enough money to retire comfortably. That’s a record low.

This is not a surprise considering that 49% of people 55 and older have saved less than $50,000. That’s so far short of what’s needed as to be outrageous. That could pay out around $4,400 a year over 30 years assuming an 8% return. Nowhere near enough money.

Those retired or going to retire over the next decade or two may at least have the benefit of social security and perhaps a pension. Younger folks should know that social security will be so far insolvent as to be unavailable to everyone.

Hope is not a strategy.

Only 25% of workers are highly optimistic about covering food and housing costs in retirement. That means 75% of people know–absolutely KNOW–they can’t take care of themselves in retirement. Stunning!

For those currently retired, only 20% are confident about being able to afford a secure retirement. Only 25% say they have enough for medical expenses. Only 34% are optimistic about covering basic expenses. That means two-thirds of retirees believe they can’t pay for the basics. Unbelievable!

On the bright side, workers are doing something to change their situation. They are cutting spending, working more hours, saving more, and talking to a financial professional. I hope they get good advice.

One major problem is that so many believe they can work longer to postpone retirement. But, 50% of current retirees left the workforce sooner than they expected because of health problems, downsizings or obsolete skills. Counting on working longer is not a solution.

Also, two-thirds of workers planned to work after retiring, but less than 35% actually ended up being able to work. Hoping to work more is not necessarily a viable option.

What do people need to do? They need to save more. They need to invest that money wisely. They need to think hard and independently about the amount of money they will need and why. They need to plan to take care of themselves, not hope that things “work out.” Hope is not a strategy. Hope for the best, plan for the worst.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.