Regardless of how representative those numbers are we know that in aggregate they are way too low.
There is a line of thinking that exists whereby people think that the magic number concept as put forth by the financial services industry is inflated for self-serving purposes. My first reaction to this is "ok, go ahead and save less." But of course it is in the industry's interest for people to save and invest more so while there might be something to the magic number being over inflated it is also clear that $143,300 has a low probability of growing to the actual magic number (if the one from the industry is too high).
On what I think is a related note a reader left an interesting comment a few days ago;
Thought I would share a neighbor's strategy. He is 70 and has 1.2 million in a tax deferred account. His plan is to keep 300K invested indefinitely and take 5% a year from the remaining 900K. His thinking is that when he is 90, the 300 should have grown to 6-900 and he can do it over again. Can't say I fault the logic. He should never run out of money and yes he will likely leave a nice estate.
This is not unheard of and our firm has a couple of clients doing something very similar and obviously this is along the lines of a bucket strategy but it was an interesting comment. If he can stick to a 5% withdrawal rate there is a very good chance that we won't run out of money. Remember that 4% works out to a 93% chance of not running out of money and the higher the withdrawal rate the greater the chance of not having enough but it is not like a 6% withdrawal rate is a guarantee for running out. I forget the exact numbers but I think at 5% the odds of not running out are in the high 80 percents and the above investor is only looking for 20 years.
More and more this entire issue is evolving into the need to come up with a solution that can work for you. Obviously most people now will not be getting a pension. Most people's primary bucket of money is their 401k which creates an infinitely wider range of outcomes compared to a pension. Whatever the circumstance, someone who works for 40 years and winds up with $200,000 will have to do things differently in retirement than the person who works for 40 years and winds up with $900,000.
8 comments:
Just FWIW, I always find myself stumbling over this withdrawal rate, thinking that it is meant to represent the amount that you need to cover your spending.
But actually, it is supposed to include the taxes that are incurred on the withdrawal as well, right?
So a person taking 4% p.a. is actually only getting, say, 3% to spend.
In my experience it's rare ever to find a mention of that in articles on withdrawal rates, and I labored under that dangerous misconception for years.
While you are correct, the amount of income that is actually taxable relative to $40-$45k is low. For a married couple I think the first $17k or so is not taxable. It is still an issue but not as big as if the entire $40k was taxable.
A thought about the $143,000: Obviously this amount is too low for someone age 60 to live on, but it looks like the balances are reported by account, not by individual. Someone who worked several jobs during their lifetime might have several 401k accounts (or rollover IRA accounts) if they don't keep rolling everything over to their current employer plan.
So the individual results might be better than the Fidelity stats indicate. Whether this is substantial or not I don't know. I think it's pretty clear from other data that retirement savings in general are way too low.
It seems unthinkable that someone would leave money in the old 401k plan when they change jobs but i realize that is a bias of mine and that people do continue to "manage" 401ks in old plans, maybe they don't know about rollover IRAs?
I do not have any statistics to back it up, but I think S.B. is probably on to something. For example, I have a 401k account with a former employer (an S&P 500 company). The offerings are pretty good, the fees are low, and I track and manage the account by computer (or phone if I have an unusual question). The reason I did not roll it over into an IRA is because they made it such a pain; can only close the plan with a paper check sent to me, which I then have to send to my IRA custodian, and only then could I invest the money as I wanted it to be invested (which it currently is in the old employer's 401k plan). I figured the fairly substantial sum would be out of the market for at least 2 weeks, and probably closer to 4, during the closing and re-investment process, so I just left it with the old employer.
I left my 401k with my former employer account mainly because it offered a guaranteed income account of 3%, which is not bad in this day and age. This portion is considered my "safe" money, as I invest aggressively elsewhere
I agree with everything you write about saving for retirement, however, my wife has other opinions. So trying to develop a plan that will work into the future is not easy. Trying to coordinate our 401ks are almost impossible. She wants to begin taking SS while still working while I think it will be more beneficial to wait and get a higher monthly payout. Her father is still doing well at 94. So, as you can see, even those that can plan for the future, have many roadblocks.
Roger, FWIW, I my wife and I have multiple accounts that are in the range quoted, but in aggregate the sum is a comfortable place for us to be at this point in our time horizon. The accounts are being held separately because until recently we were advised not to comingle the funds by an accountant. Also roth accounts are separate, and some accounts are a pain experience to close. My wife has an account that is under $500, that requires an act of congress to transfer. That account would certainly lower the averages of the industry. This would certainly create a low bias in the reported information.
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