Will you have enough money to comfortably retire?

As I have shared before with many readers during our office visits and in other blog articles, one of my favorite activities in the financial planning profession is visiting with so many fun, interesting and intelligent people during client reviews and new client meetings.  I really enjoy “peeling back the layers of the onion” and finding out about where people come from, what motivates them, and what life events have shaped them into who they are today.  One observation from fifteen years of these encounters is that I often will hear the same questions asked with great frequency during short discrete time periods.

For the first half of 2016 one of those questions has centered on the upcoming Presidential election and the ramifications of the election outcome.  The other question I have been hearing with increased frequency is “Will I have enough money to retire?” or a variation of that question “How does my retirement nest egg compare to other retirees?”  Since so many people are asking these two questions, it is probably a common concern that deserves some attention.

We will defer the question “Will I have enough money to retire?” until a little later in the article, as there is usually not a simple answer to the question.  The question “How does my retirement nest egg compare to other retirees?” is a lot easier to answer.  To answer this question we will refer to two reports: the Government Accountability Office (GAO) 2013 Survey of Consumer Finances and the Economic Policy Institute (EPI) report, The State of American Retirement.

In both publications, we find some pretty disturbing numbers.  The GAO survey indicates that the median household approaching retirement (ages 55 to 64) has a retirement nest egg valued between $10,000 and $20,000.  The EPI report is even more chilling: the median retirement savings amount for Americans was only $5,000.  However, on a more positive note, EPI reports that the average (mean) savings of all Americans is $95,776 in 2013.

A quick review of some terms from statistics (everybody’s favorite math subject I am sure!) may be in order to make sense of these numbers.  The mean, or average, is the summation of all values in the population sample divided by the sample size.  The median is the value separating the higher half of a data sample from the lower half.  The wide disparity between the median value of retirement savings and the mean, or average, value of retirement savings indicates that there are a high percentage of survey participants with little or no retirement savings, and a substantial percentage of survey participants with well over $95,776 in retirement savings, helping to skew the average retirement savings higher.

Digging deeper into the GAO survey reveals that 41% of participants have not saved anything for retirement!  Of the 59% of participants who have saved for retirement, 7% have saved less than $10,000 and 9% reported having more than $500,000 saved.  The median net worth of the 59% who have saved for retirement is reported to be $337,000.

This data is important, but perhaps not as relevant to you the reader as it places no parameters on age or stage of life for retirement savers.  For this information, we turn to the EPI report.  Here are the average (mean) savings in 2013 for households of different age brackets:

  • Ages 56 to 61: $163,577.
  • Ages 50 to 55: $124,831.
  • Ages 44 to 49: $81,347.
  • Ages 38 to 43: $67,270.
  • Ages 32 to 37: $31,644.

It is interesting to note that these averages are down considerably from the values reported in 2008.  We can assume from these numbers that many people have had to draw down on their retirement savings to meet current living expenses and/or many of these participants pulled their money out of the stock market near the bottom of the correction and never fully reinvested their retirement savings.  (Now you understand why we sound like a broken record when we advise against trying to time the markets:  it never works!)

If you are at all curious about how you stack up to the average American, you now have the data to make an informed comparison.  From my vantage point, the majority of our clients are positioned very favorably compared to the average American.

Now back to the other question, “Will I have enough money to retire?”  Unfortunately, this is a complicated question to answer for most people because it depends on many variables and involves uncertainty about how things will play out in the future.    In addition, the requirements to live a comfortable retirement are different and unique for each client because each client’s needs and circumstances are unique and specific.  One size does not fit all in this arena, and the size of your retirement nest egg does not necessarily mean you will live the retirement of your dreams, nor does it necessarily mean that you are doomed to work until the day you die.

Factors that impact your ability to comfortably retire include the size of your retirement savings, the age you plan to retire, your life expectancy, your spouse’s life expectancy (if applicable), your retirement living expenses, the health of you and your spouse (if applicable), pension benefits and/or your social security benefits among others.

When we create financial plans for clients, we plan for different scenarios and look at the probabilities that our clients will reach their goals given those different scenarios.  As you can imagine, there are an endless array of possible scenarios that could play out, so focusing on the most likely outcomes helps to prioritize actions.

As we stress often during the financial and retirement planning process, the plan we develop together is a roadmap to help the client move from point A to point B, with point A being the present and point B being retirement or some other future goal.   However, sometimes life throws curve balls, roadblocks and detours in our way, and that requires us to modify our plan.  And here is the complicating factor with retirement planning:  the destination is not always static or fixed.  Retirement, or point B on the map if you prefer, can change several times over the course of the journey because of circumstances that may be beyond our control.  The real value in retirement planning, or financial planning in general, is not in the tangible deliverable report we review together.   The real value of planning is the iterative process that helps us monitor our progress towards our goals.

Benchmarking can be a useful tool in helping us to assess our progress towards our goal(s).  But knowing how our retirement nest egg compares in size to our contemporaries is not the only predictor of success in reaching our retirement goals.  It is an important factor to be sure, but only one factor of many.  Many of these factors can only be uncovered through the planning process, and this is the reason we stress and emphasize the importance of the planning process.  If it has been some time since your retirement plans have been reviewed, please call our office so we can schedule time to monitor your progress on the retirement journey.