Dear Readers —
I thought I'd share the results of some interesting studies that look at how well we're preparing for retirement so you can compare how you're doing personally.

The good news, according to a study conducted for Peppercom in the Spring of 2002, is that most of us (81 percent) say we are saving on a regular basis. However, despite the fact that everyone claims to be worried about having enough income in their later years, less than half of the 1,000 households surveyed say they are specifically saving for "retirement!"

The second most common savings goal — cited by 35 percent of the respondents — is a vacation. 29 percent say they are saving in order to pay off debt. One out of five (20 percent) indicated they are saving for a car. (The total adds up to more than 100 percent because people cited multiple reasons for saving.)

It's no surprise that the higher someone's income, the more likely they are to save. Savings priorities also change. Among households with annual income of $100,000 or more, 79 percent say they are saving for retirement, while a third also mention they are setting aside money for a child's education. However, having a higher income doesn't mean having less debt. In fact, a higher-than-average percentage of people in this income range are also saving to pay off credit cards.

How much are our fellow Americans saving? About 40 percent of us say we are setting aside between 5 percent and 10 percent of our monthly income. A third are saving more than 10 percent. But a substantial segment — 24 percent — saves less than 5 percent, according to the survey.

Most people say they wish they could save more but can't afford to. While the number one reason given is lack of income, high credit card and mortgage payments follow right behind. In other words, debt. (There's a theme here.)

Six out of ten surveyed candidly admit that the money they could be saving is instead being spent on eating out. In households with annual incomes of $100,000, this jumps to 75 percent. The other items we're spending potential retirement savings on include entertainment, "personal indulgences," clothes, hobbies and electronics. In other words, we're making lifestyle choices. It comes down to spend it now or save it for later. Fully 30 percent of us prefer to spend money impulsively or because "life's too short."

Studies conducted by the Employee Benefit Research Institute suggest that people don't save for retirement because they have no idea how much they're going to need. So, the most helpful thing you can do in terms of financially preparing for retirement is to estimate the size of the nest egg required to fund the lifestyle you want.

Unfortunately, many of us don't take this first, critical step. Unless you do, you subject yourself to a life of worry, wondering if you'll have enough income later on. Investing is a journey: You start from Point A and travel to Point B. In addition to estimating where you need to end up, you've got to make an honest assessment of where you stand today. Then you can plot a course to get you there.

The paths are many. And, frankly, having a trusted financial advisor who can act as your guide is a big help when it comes to navigating the different types of retirement accounts available, choosing the right investments and in the right combination, and pointing out necessary adjustments along the way.

For instance, you might have picked up the technology trade winds a few years back and thought you were set to sail into retirement in five years. But then we encountered the turbulent market of the past two and a half years. You've lost ground. Do you stick to your timetable and resign yourself to living on less income or do you postpone your retirement until you can realistically reach your original financial target?

What are some of the strategies you can use? Save more? Re-adjust your investment mix? Lower your retirement income goal? If you grow too conservative with your investments, you might never arrive at your goal. Your financial advisor can help you map out a revised plan. And, perhaps most importantly, he or she can prevent you from making bad investment decisions based on emotion.

All estimates of how much to save for retirement start with an estimate of how much income will be required. While it's impossible to know this for sure, the closer you get to retirement, the better idea you have of what your expenses will be. However, that shouldn't stop you from coming up with an estimate even if you've got decades until you retire. Having a specific nest egg goal is the critical ingredient. It helps put your goal into concrete dollars and cents so you have some idea of what you should be saving today. You should reassess your original estimate periodically and make adjustments.

One approach is to imagine how you want to spend your retirement and estimate what this would cost if you retired today. While your mortgage might be paid off, you will still have to pay for homeowner's insurance. Your clothing and dry cleaning bills will probably decline if you're not working, but you'll still have your telephone and car insurance bills. Will you eat out more or less? In all likelihood, the kids will be out of the house and you'll no longer be paying for college, so subtract those expenses. Are there hobbies you plan to take up? Do you want to travel?

Once you come up with an estimate of your annual income based on today's dollars, you've got to factor in how much your retirement lifestyle will cost in the future. Inflation is low today, but it shows no signs of disappearing completely. If you're 45 years old today and plan to retire in your mid-sixties, an average annual inflation rate of just 3.5 percent means you'll need twice as much income in 20 years just to buy the same things you're buying today.

The final step is to calculate how large a nest egg you'll need in order to provide the income you want.

Fortunately, the folks at the American Education Savings Council (ASEC) have created a simple worksheet you can use. You can access this "Ballpark Estimate" on their Web site,, or at Once you enter your current income, you have to decide whether you're going to need more or less than that.

This brings up the valuable work done by the "RETIRE" project at the Center for Risk Management and Insurance Research at Georgia State University, an ongoing study that has been conducted since 1988. The author of the study, Dr. Bruce Palmer, developed a formula that computes how much of your pre-retirement income you'll need in order to enjoy the same standard of living when you retire. This is called the "Replacement Ratio."

For instance, take a married couple aged 65 and 62 who had with a combined income of $60,000 the year before they retired. One spouse earned 60 percent of the total ($36,000) and the other brought in 40 percent ($24,000). In order to afford the same lifestyle the first year of their retirement, they would need 76 percent of their pre-retirement income, or $45,600.

Why not 100 percent? The biggest reason is that a significant portion of their retirement income would come from Social Security, on which most people pay little or no income tax. So you don't need as much total income to end up with the same amount of money on an after-tax basis. In addition, the RETIRE formula calculates how much someone in a particular income bracket sets aside in savings each year while they are working. When you retire, it's assumed you stop saving (which may or may not be true), so that amount is not included in your retirement income either.

Getting back to our new retirees, the question is, where will they get the $45,600 that they'll need? A portion will come from Social Security, which Palmer also computes based on actual, current benefit levels. It turns out that Social Security will supply 35 percent out of the 76 percent of the income that the retirees will need to replace.

The critical number, as Palmer points out, is the difference between the Replacement Ratio and the percentage that will be supplied by Social Security. That's the income you have to come up with yourself through a combination of company retirement benefits and personal savings.

For our new retirees, this amounts to 41 percent of their pre-retirement salary, or $24,600 a year. With the assistance of Sam Van Why, an instructor at the College for Financial Planning, I calculated how much our couple would need to have in retirement savings. Assuming their nest egg earns 8 percent a year, inflation runs 3 percent annually, and they will spend 25 years in retirement, they will need $369,000 when they retire. This amount includes a 3 percent increase in their annual withdrawal so that higher living expenses don't eat into their standard of living.

Are you shocked? Relieved?

What makes the RETIRE project so useful is that the results are based on real people. The data are based on actual expenses people report in the government's Consumer Expenditure Survey. This tells us, for instance, how much the average household with a $40,000 income is likely to save and to spend on housing, food, transportation, healthcare, etc. Here are the results for various income levels (the numbers for $200,000 in income are extrapolated):

The table below is based on a married couple, with both spouses having careers. One earned 60 percent of the household income, the other 40 percent. They are 65 and 62 years old at retirement.


 Pre-retirement Income  $20k  $50k  $90k  $200k
 Replacement Ratio  83 %  76 %  75 %  86 %
 Percent Social Security Replaces  56 %  37 %  30 %  13 %
 Percent You Need to Replace  27 %  39 %  45 %  73 %


There is an important limitation to both the RETIRE calculation and the ballpark estimate: they only tell you how much income you're going to need during your first year of retirement. In other words, they don't compute (as I did above) the increasing amount of income you're going to need in order to overcome the impact of inflation over the entire span of your retirement. And this can really add up. If inflation averages 4 percent a year instead of 3 percent, the income you start retirement with will need to double in 18 years instead of 24.

What if your assumptions about investment returns don't materialize?

A bear market early in your retirement years will significantly reduce the income you can withdraw while a bull market will increase it. In addition, all of the formulas used to estimate retirement income are based on an "average" person who, in point of fact, does not exist. As Dr. Palmer admits, "None of these numbers are indicative of a specific individual's situation. That's where a financial planner comes into play."

Finally, the ultimate wild card is what kind of health you're going to be in. You might be hale and hearty when you retire. But it only takes one major medical problem to throw your whole retirement budget into disarray.

At the very least, plan on needing 75 percent of your pre-retirement income the first year you retire. But save as much as you can so you've got a cushion. And, in my opinion, don't try to be both captain and first mate of your retirement ship. Find a qualified financial advisor who can help guide you.

All the best,



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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.