What’s a safe retirement withdrawal rate? If you’re like most Americans, you probably think that you need $1 million to achieve it. And there’s a reason you think that. Financial advisers for years have relied on what’s known as the “4% rule” to help clients figure out how to avoid outliving their assets.
Under that rule, $1 million gives you a somewhat acceptable starting point of $40,000 a year.
What, you say, $40,000 isn’t enough? Of course it isn’t. As economics professor Teresa Ghilarducci at the New School for Social Research in New York points out, it’s laughably short of reality. She writes in a recent column in The New York Times:
To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. If you have an income-producing partner and a paid-off house, you need less. This number is startling in light of the stone-cold fact that most people aged 50 to 64 have nothing or next to nothing in retirement accounts and thus will rely solely on Social Security.
The really stunning part, as she notes, is how many Americans have virtually empty bank accounts. New data from the Employment Benefit Research Institute show that two-thirds of workers say that they have saved money for retirement. But nearly the same percentage admit that they have less than $25,000 to show for their efforts. There is no safe retirement withdrawal rate for them because there is no money to withdraw.
As Ghilarducci starkly warns, such dismal savings rates will have a real impact on people’s lives as they age. She suggests that nearly half of middle-class workers will simply subsist, living Third World calculations of dollars per day, never mind the typical “golden years” notions of travel and leisurely golf outings.
You likely have noticed the shift. Take a close look at the folks handling your bags at the airport, checking your groceries, or pouring you a coffee during the day. Increasingly, you see the service jobs once populated by college kids and teens instead being held by retirees.
Some have a pension. Many probably took federal benefits early. Yet it’s still not enough. They need something, anything, to close the gap. A Boston College report suggests that people who feel unprepared should target working to age 70. What’s less clear is the availability of jobs for masses of graying part-timers.
The implications for savers still in their productive years are staggering. First, anyone taking their retirement seriously is right to wonder if government benefit programs will meet the need. Poverty is likely to quickly become a real issue for older Americans right here at home, not an abstract concern about other people overseas.
Importantly, Americans who have the advantage of time, even if it’s 10 years, should ensure that their own retirements are not abandoned to the vagaries of poor planning, chance, or unforeseen market meltdowns.
It’s time to buckle down and find your safe retirement withdrawal rate, then make a plan to get there, on time, securely and with the minimum of risk.