Many people feel that the odds of getting Social Security benefits at retirement are about the same as finding the Hope Diamond in a Cracker Jack box. This is probably an overreaction, although it is likely that benefits may be reduced, the retirement age raised, or both. If you're planning on retiring without Social Security, however, you're probably not saving enough.
The fundamental problem of saving for retirement is making your money last longer than you do. Unless you plan to take up gorilla wrestling at 65, you have to figure out how long your savings must last.
One place to look: The Internal Revenue Service has tables that show how much you must withdraw from retirement plans at the year in which you turn 71.5. The IRS assumes that you're going to live 15.3 more years. If you have a spouse 10 years younger, the IRS assumes one of you will be around for 25.3 years, provided one, in particular, finally learns that the trash goes out on Wednesdays.
Another place to look is the mortality tables for group annuities, which the insurance industry uses. These say that a 65-year-old male retiree has a life expectancy of 19 years; a female, 21.7 years.
The problem: That's how long the average person lives. Many of those 65-year-olds will live longer.
So, let's look at it another way: What are the odds that a 65-year-old retiree will live to 90?
.Of the men now 65, 28% will live to 90, says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries. Eleven percent will live to 95, and 2% to 100.
.Women: 40% will live to 90; 19% will live to 95; and 5% will live to 100.
It makes sense, then, to assume that your savings will need to last 30 years. A simple retirement calculator would tell you that if your savings earned 9% a year, you could withdraw 8% of your money the first year and keep taking that amount for eternity. If you had $1 million in savings and earned 9% a year, you could take $80,000 a year, and still give your heirs a starter castle.
Unfortunately, it would also be a stupid retirement calculator. Why?
For one thing, the only investment that guarantees 9% these days is offered by felons. A 10-year Treasury note, for example, currently yields 4.25%.
Anyone who guarantees 9% will also sell you a bridge in Brooklyn.
The stock market might provide higher returns. The Standard & Poor's 500-stock index has returned an average 10.4% a year the past 40 years. The average balanced fund, which mixes 60% stocks and 40% bonds, has averaged a 9.3% annual gain the same period.
Unfortunately, those are just averages. If you retire at the onset of a bear market, the results are devastating. For example, the S&P 500 plunged 46% the 12 months ended September 1974. If you were taking 8% withdrawals, your account would be down 54%. Your withdrawals would also reduce gains in later years.
The other problem: inflation. The consumer price index has gained 2.7% the past 12 months. Let's assume inflation stays at 2.7%, and that you withdraw $1,000 a month. After 10 years, your $1,000 will have the buying power of $896. After 30 years, your $1,000 will be worth $452. To keep up with inflation, you'll have to increase your annual withdrawals.
The American Association of Individual Investors used historical data from 1926 through 1995 to calculate the odds of a retirement portfolio surviving 30 years, using various withdrawal rates. The conclusions:
.Keep at least 50% in stocks, which will increase the odds of higher returns over time.
.Start by withdrawing 4% from your retirement portfolio. "Above that, you're rolling the dice," says John Markese, president of AAII.
The beauty of Social Security - aside from its help to the least fortunate - is that it's an inflation-adjusted payment. If you're going to go without it, to be very safe figure on saving $25,000 for every $1,000 of annual Social Security payments you would have gotten.
All things considered, it might be cheaper to look for ways to fix Social Security.
