Funding Retirement

The greatest threat to those who are retired is not death. It is running out of money. While no one looks forward to dying, without sounding insensitive, it is relatively inexpensive to die. There are final expenses which may include hospitalization, hospice care, a funeral or memorial, and burial or cremation. But these expenses are typically less than $10,000 for most people.

The much greater costs are those of living over a long period of time. Consider a person just now entering retirement who needs $4,000 a month to live comfortably.
Let’s imagine that Social Security provides $1,500 a month. That leaves $2,500 which must come from a pension or withdrawals from retirement savings.

How much money must a person have in savings to be able to draw $2,500 a month for the rest of her life? The rule of thumb in the financial planning community is that a sustainable rate of withdrawal is 3-6%. This will allow the retiree to maintain her purchasing power against the erosion of inflation and never run out of money.

So, if we assume a 4% withdrawal rate and a $2,500 monthly income need, our retiree will need $750,000 in retirement savings. This is significantly more than most Boomers have set aside currently for retirement. In fact, over half of that generation has less than $50,000 in savings.

Clearly, people need to save more. The question is, will they?