Will Your 401-k Be Enough?

Research that was spearheaded by the Federal Reserve suggests that those pre-retirees, ages 60-62 are significantly unprepared for retirement. Here are some of the basic facts:
The median income for couples in this group is $87,700 with a median 401-k account of $149,400. If we assume a retirement income need of 85% of pre-retirement income, they’ll need about $75,500 per year plus annual increases for inflation. Social Security may provide $30,000-$35,000 of their need leaving the 401-k to make up the balance. Using a 5% withdrawal rate from the 401-k produces an additional $7,500 per year leaving an annual short-fall of $33,000-$38,000 or about 50%.

How did this happen? Americans have been under-savers for decades. Until recently, historical savings rates varied from zero to about three percent annually. In the days of old, people counted on company pension plans to provide the foundation for their retirement. But, in the eighties, companies began to abandon pension plans in favor of 401-k plans as a way to cut future costs. While 60% of this age 60-62 group has a 401-k plan, most under-contributed while many more failed to participate. Couple all of this with a decade where the stock market produced virtually no returns and you have created the perfect storm.

What’s the solution? There are no easy solutions for this group because the most important element, that being time, cannot be retrieved. However the first step is to assess the size of your problem by doing a retirement analysis. It may be that you can comfortably live on a lot less than 85% of your pre-retirement income. Other possibilities include downsizing your home to retrieve some equity that can be invested for additional cash flow. You could also tap your home equity with a reverse mortgage. Another strategy would be to use your 401-k money to buy a lifetime annuity. Based on current rates, you’d increase your cash flow by about $3,000 per year but part of this added cash flow represents a return of your principal and there will be nothing left of your 401-k for your heirs. Another choice, one that many people are making, is to simply work longer either on a full-time or part-time basis. If you fall into this age 60-62 group and would like a free retirement analysis, email me at stewart@welchgroup.com and put ‘Retirement Analysis’ in the subject line. We’ll run a report and give you a quick assessment of strategies that might be helpful.

Lessons for the next generation: Unfortunate circumstances, lack of planning and less-than-optimal decisions have left many of the Baby Boomer generation in a difficult position regarding their retirement plans. This doesn’t have to be the case for the next generation. A few simple changes can turn a retirement nightmare into an early retirement dream:
• Start early. Save a minimum of 10% of your gross income. If you are in your thirties and haven’t created significant savings, up this percentage to 12%-15%. If you’re just getting started and you’re in your forties, target a savings program of 15%-20%.
• Capture the match. If your company offers to match a portion of your 401-k contributions, be sure to invest enough to capture the entire match.
• Invest in stocks. Just because the last decade produced poor stock market results, don’t give up on the stock market. American free enterprise is alive and well and I expect the stock market to return to more normal historical returns (8%-12%) in the decades ahead.