Devoted to understanding the basics and fundamentals of investing

The Wall Street Journal on 1 July 2006 on p. B1 has an article by Jeff Opdyke titled "Will You Be Able To Retire?"  It is a great question.  Mr. Opdyke quotes some startling statistics:

• 22% of current workers are not saving at all.

   

• 40% of current workers have less than $50,000 put aside for retirement.

   

• Almost 45% of households with working-age adults are at risk of not being able to maintain their pre-retirement standard of living.

   

Mr. Opdyke cited four examples of methods people can use to ensure they have enough savings available to retire. 

1.      Charles J. Farrell is a financial planner in Medina, Ohio .  Mr. Farrell has calculated some age related ratios to see if you are on track to hit his proposed goal of getting to retirement with zero debt and 12 times your pre-retirement income in your nest egg.

a.      A 30-year old should have 10% of their current salary saved and no more than 1.7 times salary in debt.

b.      A 45-year old should have savings of 300% (3 times) current salary and debt of 1 times salary or less.

The savings calculation includes any contributions an employer makes to a retirement account.  It assumes a salary of $100,000 and the average priced home in the country.  If the salary is higher, you can support higher levels of debt.  The calculations assume you save 12% of your income and earn a 5% return on investments.

2.    T. Rowe Price recommends you save 15% of your annual salary (including employer contributions).  They assume it will be invested 60% in stocks and 40% in bonds.  By their calculations, this will produce a nest egg that will replace 50% of your pre-retirement income before Social Security is included.   If you have delayed saving, you will have to save more and will have a smaller percentage of your pre-retirement income available when you retire.

3.      NY Life recommends replacing the bond portion of your retirement fund as you retire with an immediate annuity.  This has two benefits, it lowers the risk you will outlive your income and it provides 35% to 50% more income than bonds by returning some of your principle in each payment.  The downside is that you give up control and liquidity of the annuity.

4.      Russell Investment Group recommends managing for a certain level of income instead of a certain level of assets.  If the portfolio reaches the point where it can’t generate the required income the balance is used to buy an immediate annuity that does.  “The cost of the annuity is built into the portfolio ensuring the required money is available.”

So, go check your savings and make sure you are on track for a secure retirement and not the local poor house.