Retirement is an option, not an entitlement. Anyone who want to exercise that option needs to prepare accordingly.
Relying on a pension means relying on the promises of a corporation or politicians; maybe the money will be there as expected, but maybe it won’t because there are no guarantees and bad things happen in life. Social Security, regardless of its configuration, was never meant as a retirement program and was established as a supplement to other means during retirement. So maybe it would be best if many Americans were much more self-reliant about their retirement, especially if they want to have comfortable golden years.
Learn about investing for retirement, including 401(k), 403(c), and other plans meant for that purpose, as well as IRA’s, SEP-IRA’s, and other vehicles meant to accumulate assets for that purpose on a tax-free basis. Realize there are several major factors of varying degrees of importance that determine the long term results of investing for retirement, though one’s control over these range from none to partial to full. These factors include:
Amount invested (highest importance; full control)
Asset allocation (high importance; full control)
Security selection (low importance; partial to full control)
Market returns (high importance; no control)
Time for investments to compound (high importance; partial to full control)
Matching amounts (moderate importance; full control about taking, though no control about their availability)
Withdrawal starting date (high importance; partial to full control)
Withdrawal rate (highest importance; full control)
Note that the two factors that matter most, the Amount Invested and the Withdrawal Rate, are items over which an investor has the most control. While saving for retirement, the amount contributed is what the other factors work on. Unless the contributions are sufficiently large, even a very strong market, a perfect asset allocation, and a long time in the market may not do an investor much good. Said another way, those other factors will not rescue an investor from insufficient savings.
While in retirement and taking distributions, withdrawing too much can deplete assets very quickly and ruin a lifetime’s preparation, possibly regardless of strong markets and a perfect asset allocation. Obviously the effect of withdrawing too much will be compounded if the markets provide poor returns and the asset allocation is wrong. Related to this is when distributions start. Taking distributions later because one is working longer provides more income and reduces the time needed for the assets to cover. There is nothing sacred about age 65, so one should retire when appropriate to one’s situation and not because of what is ultimately an arbitrary point in time.
(The Social Security Administration provides some information on how Age 65 was chosen for benefits during the 1930’s at http://www.ssa.gov/history/age65.html (because other systems did and they thought they could manage the system) and indicates how life expectancy factors in at http://www.ssa.gov/history/lifeexpect.html (they claim life expectancy is not nearly as important as other factors). But the information they present suggests that the American Social Security system would not be having the problems it is facing if the retirement age had kept pace with life expectancy. Regardless, this is a discussion for another time.)
While everyone will have a unique situation about how they want to live prior to and during retirement, there are some rules of thumb than can be good starting points for how much to save and how much to withdraw.
How much should one save? Possibly 10% to 15% of one’s income, starting by age 30 at the latest. Starting later in life would require significantly higher amounts because of less time to compound. Starting earlier in life, even with relatively small amounts, gets one into the habit of saving and can make a huge difference later in life due to compounding. Regardless of age, take full advantage of any matching funds provided by an employer because this is free money. Maximize contributions to a 401(k) or other retirement plan.
This suggests living within one’s means, or better yet, living below one’s means, which further suggests having no debt other than an affordable mortgage for a primary residence. Never borrow money to buy a depreciating asset, such as a car. Buy only what you can afford, and if you can’t afford it, don’t buy it.
How much can one withdraw in retirement? Possibly 4% of one’s total retirement assets at age 65 or so will permit those assets to last for the rest of one’s life. A higher rate could be withdrawn if started at a later age.
The bottom line for many Americans is that if they want to have the retirement they envision, they need to save more and spend less. They must live within or below one’s means, before and during retirement.