Most Americans—And Alabamians—
In Denial About Retirement Reality
Can you live on half of what you earn now? If you can, then you might be ready for retirement.
By Brooks Clark, CFP
Clark Financial Advisors
Reprinted from The Gadsden Times
February, 2007
Actor, attorney and author Ben Stein is a respected financial commentator who often speaks frankly about Americans ineptness with regard to financial issues, especially retirement planning. During one recent television interview, Stein announced a dismal outlook for Baby Boomers facing retirement. He said, “This generation will suffer the greatest decline in lifestyle upon entering retirement than any previous American generation.“ While many of us would like to dismiss Stein’s comment as a statement designed for shock value, the facts support his assertion.
Certainly there are those who want to know what it will take to reach their retirement goals and actively work to reach those goals, but they are the exception, not the rule. I dare say that the average American does not have a clue as to what needs to be done to prepare for retirement, and that same average American is in full-fledged denial.
For example, do you know what annual income you will need for retirement? If you do, you are the one out of ten Americans that does.
Do you participate in your company’s 401K plan? If you do, then, congratulations are in order; a full 30 percent of Americans do not participate in the 401K plans that are made available to them, with less than 50 percent of workers between the ages of 20-29 participating. And, only half of 401K participants contribute an amount that will maximize matching contribution from their employers—that’s equivalent to turning down a yearly bonus from your company. Because so many companies have discontinued their defined benefit plans, which provided a percentage of an employee’s income as retirement income, 401Ks and cash balance plans are the rule of the day, with accumulated cash balances being what workers take with them when they retire. The bottom line is that preparing for retirement is now on your shoulders, not your employer’s.
Retirement legislation that was recently passed is aimed at trying to help Americans who have not planned well for retirement by allowing workers over 50 to catch up by making larger contributions to their IRA accounts and 401K plans, but although these contributions are tax deductible, only 13 percent of Americans over 50 are adding catch-up contributions to their retirement plans. This is just another example of Americans in denial when it comes to the reality of retirement.
Here are a few sobering facts about our retirement reality:
- The average American who participates in a 401K plan leaves for retirement with a balance of less than $60,000 dollars—not exactly an ideal income to see you through 25 years or more of retirement. A good estimate is that you should save $15 for every $1 you expect to need per year during retirement. For example, if you anticipate needing $10,000 of savings per year to live on during retirement, you should retire with a balance of $150,000. Or, if you anticipate needing $50,000 of savings per year to live on during retirement, you should retire with a balance of $750,000.
- Someone who reaches the age of 65 has a better than 50/50 chance of living to the age of 92, meaning that if you retire at 65, you have a better than 50/50 chance of depending on retirement income for up to 27 years.
- The average Alabamian has an annual income of $36,000 dollars per year and a projected annual Social Security benefit, at age 66, of $13,740 dollars.
- If the average Alabama worker with an annual income of $36,000 participated in his or her 401K plan, then upon retirement at 65 began to make annual withdrawals based on the plan’s total balance and the estimated number of years that balance would need to last, that annual withdrawal would be $4,680. That annual withdrawal combined with the previously mentioned Social Security benefits would equal 51 percent of the average Alabama worker’s former annual income ($13,740 + $4,680 = $18,420).
This last fact drives home the need for the reality of retirement to be pushed to the forefront of every Alabamian’s mind—living on 51 percent of the income that you have grown accustomed to is not the Welcome to Retirement! that most of us had hoped for. The good news is that there are some practical steps that can be taken to snap yourself out of denial and into action. In my next column, I will address the question, What can I do to make sure this doesn’t happen to me?
Brooks Clark is a certified financial planner with Clark Financial Advisors in Birmingham, which serves clients throughout Northeast Alabama. Clark is originally from Anniston. His e-mail address is brooks@clarkfinancialadvisors.com.
