Second only in size to the millennial generation, the baby boomer generation has shaped the course of history in recent years. Companies like Gerber and Pampers found success when the Boomers were babies and as the Boomers aged, more and more companies found success while marketing to this large generation. Now that the Boomers are headed into retirement, insurance companies and those companies that focus on retirement solutions are ready to cash in. But are the Boomers ready to cash out and retire?
A recent study by the Insured Retirement Institute entitled “Baby Boomers and Retirement Planning Strategy: Generating Retirement Income to Meet Expenditures” discusses the difficult decisions that Boomers face as they head toward retirement with little in savings. A combination of free flowing credit, inflated home values, and The Great Recession, stunted the growth of assets for many Boomers.
According to the study, the typical 65-year-old retiree needs an annual income of $50,000 per year. Based on the 4% withdrawal rule for retirement, a nest egg of 1.25 million dollars would cover that comfortably. Add in an average expected social security benefit of $16,000 and the required value of that nest egg drops to $850,000.
But do Boomers have that much?
The issue, as reported by the Insured Retirement Institute is that four in 10 Boomers have no savings for retirement. Of those that have savings, more than two-thirds have less than $250,000 saved.
If you are nearing retirement, you might have started your income planning. With an eye on expenses and a total portfolio strategy, your “number”, also known as the amount you need to save to comfortably live in retirement, might be smaller than you think. Let’s look at a few examples.
Sam has 10 years until retirement at age 65, for simplicity, we will assume Sam is not married and has no heirs. He currently earns $75,000 per year, has $100,000 saved, and contributes 3% of his salary to his 401(k) plus a 3% company match. Based on the 4% retirement withdrawal rule, that $100,000 will provide Sam with approximately a $4,000 per year benefit. Sam has some catching up to do. His goal, for the next ten years will be an ambitious one. He has to save an additional $750,000 to meet the typical income needs.
Or does he?
The study makes a few assumptions that could change things for Sam. If he chooses to live in a location with a low cost of living, he could reduce his expenses dramatically. Delaying retirement and increasing retirement contributions can also help Sam close the income gap.
Sam decides he can increase his total 401(k) contribution to 18% of his salary, including his current deferral of 3 percent plus a 3 percent company match. Deferring 15% of his income may be difficult, but is critical for ensuring he has sufficient income in retirement.
Sam decides to retire at the age of 70 and move to Harlingen, Texas, which has living costs of approximately 83% of the national average.
Sam has some tough decisions to make.
Although Sam has a long road ahead, he is making a retirement plan now that could help him retire in comfort.
Are you starting to think about your retirement plan? Contact us at Parrish Capital and let’s create a plan together for your best years.
Retirement example sourced with data from the aforementioned study.