Save and Conquer

I am sometimes asked, “How much should I save for retirement?” I often point people to the retirement calculators at dinkytown.net or to fidelity.com. Some of the scenarios at those sites ask if Social Security should be counted upon. That got me to wondering if I can count at all on either Social Security or Medicare.

One of the few things that I agreed with President Bush on, was that Social Security is in trouble and it needs to be changed soon. Unfortunately, because it will not actually run out of money until 2041, Congress decided to kick the problem down the road. The year 2041 comes directly out of the Social Security’s 2007 annual report. That report also states that Social Security will not be fully funded starting in 2017. Medicare hospital insurance is in even worse shape. It is already not fully funded, and will run out of money in 2019.

The boards of Social Security and Medicare say, “We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs. The longer we wait to address these challenges, the more limited will be the options available, the greater will be the required adjustments, and the more severe the potential detrimental economic impact on our nation.”

What I get out of this is that we will soon be on our own for all retirement savings including health care. Our current taxes are just going to keep the people who are currently living off these programs from going under.

So, what will it cost to retire in the coming era of bankrupt entitlements?

I think you have to assume that you will need as much or more income than you currently do to live. You will also have to add the cost of health insurance if your employer currently pays it. That means that you cannot use the value of 80% of your current salary as a retirement baseline. Planners use 80% because you will not need to save for retirement after you are retired, and Social Security should start paying, as well. However, without Social Security and Medicare, you should use at least 100% of your current salary as the necessary baseline.

Also, don’t forget about inflation. If you are currently earning $100,000, you will need nearly $136,000 to have the same buying power after ten years of 3.1% inflation. (And 3.1% is probably low over the next ten years.)

If you assume that you can withdraw 4% of your assets without eating into your principle as well as keep up with inflation, you will need to have your inflation-adjusted salary divided by 0.04 in saved assets. For example, if you are currently making $100,000 and will retire in ten years, you will need to have $136,000/0.04 = $3,400,000 in assets. Yeouch!

Keep saving, investing wisely, and reading SaveAndConquer.com.

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