Saving for Retirement

People are living longer while dark economic and political clouds approach from the horizon. What can individuals and families do to help protect their financial future? How can we best care for ourselves and those we love?  

By Mark D. Harris

America and the world are aging. In almost every land, the number of workers is falling relative to the number of retirees. Fewer workers result in less revenue from profits and taxes. Corporate and government pension systems (such as Social Security in the United States) try to maintain payments to retirees, so governments incur more debt and private pension funds become underfunded. As fewer men and women marry, and fewer couples have babies, the workforce continues to shrink, and economies begin to fail. The entire financial system becomes less stable.

Meanwhile, inflation is over 7% and interest rates make your eyes water. Experts predict financial gloom, and no one seems to know how to dodge or divert the coming storm. For many governments, cost cutting is politically impossible, and their main solution is to print (create) more money. Furthermore, politicians shift more costs to retirees themselves. For example, Medicare is charging the aged more and more for health insurance, at just the time that the elderly need it the most.

If there ever was a time for people to take charge of their own financial destiny, it is now. The MDHI has articles on Robust Thrift, How to Decide How to Invest, 70 Ways to Save the Environment and Beat Inflation, Getting Rich Vs Growing Rich in Investments, and others, to help readers protect their financial future. This article will tackle another important financial task…planning for retirement.

Three steps towards understanding your financial position in retirement.

  1. Calculate your retirement income need
  2. Calculate your expected retirement revenue (surplus or shortfall)
  3. Understand and choose how you will address any shortfalls you have.

Retirement Income Need

If you have a budget and know your expenses, you have a good snapshot of what you will need in retirement. Some short-term expenses will change, as perhaps you will need less fuel. Some long-term expenses may change, as perhaps you will pay off your home mortgage. Your overall cost of living is likely to increase over time due to inflation and an increased need for health care with aging. Cost of living increases from pension plans will likely lag real cost of living increases due to inflation.

If you do not have a budget and know your expenses, make a budget, and learn what your expenses are. Every family and every individual has a main river of money coming in and a thousand tiny streams of money going out. Plugging just a few of those streams will save piles of cash over time and may make a financially stable retirement possible.

As a rule of thumb, people need about 70-90% as much money in retirement as they needed in their last working year. Income sources include Social Security (after age 62), pensions, annuities (such as life insurance), savings (Individual Retirement Accounts, 401(k), 403(b), etc.), royalties, or rents. Living on less than 70% of current income requires significant lifestyle changes that most people are not willing to make. Once you know your expenses and your sources, calculate:

Retirement Income Need (RIN) = Retirement Expenses (RE) – Lifetime Income Sources (LIS)

For example, consider John and Jane Smith, a married couple at age 40 who hope to retire at age 65. If their current expenses are $90,000/year, they will need at least $90,000 per year in retirement income. If their current combined income is $100,000 per year, they can estimate that they will need at least $70,000-$90,000 per year in retirement income. In this example, John and Jane are saving 10% of their income, a wise practice.

Surplus or Shortfall?

The next step is to figure out if your currently expected lifetime income sources and savings will be enough to cover your need. This requires knowing how long you can expect to live (on average), and how fast you can make withdrawals on your savings accounts and not run out of money before you run out of life.

An average man in the United States with no significant medical problems at age 65 can expect to live to age 84. An average woman at age 65 can expect to live to age 87. For a married couple at age 65, their resources have to last 22 years, on average.

The Sustainable Withdrawal Rate is the maximum percentage that can be taken out of savings each year leaving enough money to last the expected lifetime. On average, an individual can withdraw 4% of their savings each year from age 60-70, and 5% after age 70, without running out of money before they die.

Year Withdrawal Rate Retirement Savings Withdrawal Amount
1 4.0% $500,000.00 $20,000
2 $20,000 + inflation rate (5%) $480,000.00 $21,000
3 $20,000 + inflation rate (5%)  $459,000.00 $21,000
4 $20,000 + inflation rate (5%)  $438,000.00 $21,000
5 $20,000 + inflation rate (5%)  $417,000.00 $21,000
6 $20,000 + inflation rate (5%)  $396,000.00 $21,000
7 $20,000 + inflation rate (5%)  $375,000.00 $21,000
8 $20,000 + inflation rate (5%)  $354,000.00 $21,000
9 $20,000 + inflation rate (5%)  $333,000.00 $21,000
10 $20,000 + inflation rate (5%)  $312,000.00 $21,000
11 $20,000 + inflation rate (5%)  $291,000.00 $21,000
12 $20,000 + inflation rate (5%)  $270,000.00 $21,000
13 $20,000 + inflation rate (5%)  $249,000.00 $21,000
14 $20,000 + inflation rate (5%)  $228,000.00 $21,000
15 $20,000 + inflation rate (5%)  $207,000.00 $21,000
16 $20,000 + inflation rate (5%)  $186,000.00 $21,000
17 $20,000 + inflation rate (5%)  $165,000.00 $21,000
18 $20,000 + inflation rate (5%)  $144,000.00 $21,000
19 $20,000 + inflation rate (5%)  $123,000.00 $21,000
20 $20,000 + inflation rate (5%)  $102,000.00 $21,000
21 $20,000 + inflation rate (5%)  $81,000.00 $21,000
22 $20,000 + inflation rate (5%)  $60,000.00 $21,000
23 $20,000 + inflation rate (5%)  $39,000.00 $21,000
24 $20,000 + inflation rate (5%)  $18,000.00 $21,000
25 $20,000 + inflation rate (5%)  $(3,000.00) $21,000

With only $500,000 in the bank, a 62-year-old can withdraw $21,000 per year from his savings and not run out of money until age 87. While $21,000 is not a lot, if added to a Social Security check or pension payment of $2,000 per month, an adequate retirement becomes doable for an individual or even a couple.

In our example, if John and Jane Smith save $10,000 per year from age 40 to 65 in a safe account and assuming 3% annually compounded interest, by their retirement age of 65, they will have $250,000 in savings plus the interest gained.[1] If they cut expenses and increased their annual savings to $20,000 per year, assuming the same criteria as above, they will have $500,000 in savings, plus interest earned, for a total of almost $730,000.[2] Using a Sustainable Withdrawal Rate of 5%, the Smiths could withdraw $38,000 per year from ages 65 to 85 (20 years) before running out of money. Assuming expenses of $80,000 per year, they would need $42,000 more in annual income to meet their current lifestyle.  A pension or Social Security check of $3,500 per month, between the two of them, would make up the shortfall.

How to Address the Shortfall

To many people, the idea of saving $500,000 for retirement seems impossible. Thankfully, the earlier someone starts, the more compound interest works for them to grow their money. Saving only $400 per month, $4,800 per year, from age 20 to age 65, assuming only 5% interest on investments, will grow to $766,560.75.

Admittedly, many people lack the resources to save even that much. Further, if they have the resources, they lack the awareness. While no one can go back in time and correct past mistakes, we each can act now to make the best of our current situation. Do this:

  1. Set up a budget and stick to it.
  2. Ruthlessly cut expenses, while maintaining a livable lifestyle
  3. Keep three months of expenses in an account from which you can get your money quickly (a “liquid” account). Savings accounts, certificates of deposit, and checking accounts are liquid and will not decline in value, except due to inflation. Money market accounts are liquid but can decline in value with market fluctuations and inflation.
  4. Pay off all credit card debt and other debt at a higher interest rate than you can get in your investments. If you can, pay off the bill with the highest interest rate first. For example, if you owe $20,000 at 3% on your car, and own $30,000 at 5% for a kitchen remodel, pay off the kitchen first. If, due to income insecurity or even impatience, you want to pay off the car first, do it. Paying off debt is far better than unnecessary spending.
  5. Consider carefully which investment vehicles you want to use to grow your money. Talk to a competent financial advisor.

Investment Vehicles

Publicly traded companies sell stock, which confers ownership in their company, to investors. These companies use cash raised from issuing stock to run their operations and make investments. When companies do well, their stock prices go up and they pay dividends, cash payments, to their owners, those people and institutions who hold stock. Investors also make money when they sell shares which have increased in value. Stocks can be risky, however. If share prices go down, stockholders lose money when they sell their shares. If a company goes bankrupt, stockholders will likely lose their entire investment. Over the past century in the US, stocks have provided a higher rate of return than other investment vehicles such as bonds.

Companies of all sorts, as well as governments, sell bonds to raise money. Bonds are promises to pay money in the future to investors who give issuing companies and governments money now.  As such, bonds are essentially loans from one entity to another. A bond has a face value, usually $1,000 in America, a coupon rate, which is the annual interest rate that the company or government that issued the bond promises to pay the bondholder, and a maturity date, when the issuer has to pay back the face value of the bond. If a US treasury bond has a face value (par value) of $1,000, a coupon rate of 5%, and a maturity of ten years, and if person A buys it, person A will pay the US government $1,000 now. He will receive $50 per year in interest, and receive $1,000 when the government pays the value back on the maturity date in ten years.[3]  The maturity date, face value, and coupon rate are fixed, while the yield to maturity and face value fluctuate with market forces.

Bonds do not confer ownership in a company and do not vary according to stock prices. In the event of a company bankruptcy, bond holders may still get something for their investment, while stockholders (owners) typically get nothing. Bonds generally produce a smaller financial gain than stocks. High quality bonds, including government bonds and those rated AAA, AA, or even BBB, have less risk and provide smaller returns. Low quality bonds, including corporate junk bonds (rated BB, C, D) confer more risk but promise higher returns.

Investment funds such as mutual funds (MF) and exchange traded funds (ETF) combine many stocks, bonds, and other investment classes. They often track major indices (such as the DJIA and the S&P 500) in their investment decisions. Those that are not actively managed have lower fees than those that are actively managed. Unlike MFs, ETFs are traded on major exchanges (like individual stocks). Real estate can be a sound investment but is generally illiquid. Currency speculation made George Soros a billionaire but is fast moving and fraught with pitfalls. Puts, calls, and shorts are complicated, though shorting the housing market made Michael Burry a centimillionaire in 2008. Precious metals have been inconsistent as a store of value.

Choosing Your Approach

Workers in their 20s and 30s have, on average, many decades to accumulate wealth. They are also young and generally healthy enough to make up for losses. As a result, high risk but high reward investments such as growth stocks and growth mutual funds serve them best.

Mid-career workers in their 40s and 50s are at their peak earning years but have fewer years ahead than their younger colleagues. A mix of growth stocks and mutual funds with a small percentage of fixed income assets (bonds, dividend bearing, mature stocks) is preferred. People nearing retirement and living in retirement should usually decrease their riskier investments and increase their safer, and fixed income, investments.

Older people generally choose safer investments because they need the money to live on and don’t have time to make up losses. Larger, established companies are usually safer than smaller, newer ones. US companies are often safer than foreign firms. However, exceptions abound. Enron, WorldCom, and Lehman Brothers were huge and respected firms who were held up as models for others to follow…until they collapsed. Personal risk tolerance also matters. If you are deeply distressed with the thought of losing money, invest more conservatively. If you aren’t, risk more for (hopefully) higher returns.

The current world economic situation.

The world economy flounders. Investors with trillions of dollars are looking for lucrative investing opportunities and finding little. Stocks, bonds, housing, precious metals, and almost all other asset classes have also been losing money. As sailors might say, heavy weather is here, and people need to “batten down the hatches.” This means cutting spending, making prudent lifestyle changes, and developing skills to do things yourself. No one knows how long this will last, but we should all be prepared.

Maximizing Social Security

Any American with a least ten years of full-time work (40 credits) qualifies for Social Security based on the amount of money that he or she paid into it. Full retirement age (FRA), the age at which a person can receive full benefits, is 66 for those born before 1960 and 67 for those in 1960 or later. At age 62, workers can receive 75% of their full social security benefits. At their FRA, they receive 100%. At age 70, they receive up to 132% of their benefits. If you take your social benefits early (age 62) and keep working (earning more than $20,000 in a year), your benefits will be decreased by your earnings. Social security benefits are often taxable. Special taxation rules apply for those who receive a federal, state, or local government agency pension.


Money does not guarantee security. Money does not guarantee health – physically, mentally, or spiritually. Below a certain level, poverty harms security, health, and well-being. Above that level, however, the impact of money on health and happiness is much less.

Money remains important. Jesus spoke at great length about money, as have many other leaders over time. Each person and family must wisely use the resources he, she, and they have earned and have been given. This article, and other related articles, should help readers handle their money better, and be happier doing it.

[1] Assuming an annual savings of $10,000 with 3% return on a safe investment vehicle for 25 years, the Smiths would actually have $364,592.64 in savings.

[2] Given the same criteria as above except assuming annual retirement deposits of $20,000, the Smiths would have $729,185.29 in savings.

[3] Of course, reality is more complicated. As interest rates increase, the bond’s coupon rate will be lower than the market rate of return, and the market price of the bond will fall below its face value. Such a bond sells “at a discount.” As interest rates decrease, the bond’s coupon rate will be higher than the market rate of return, and the market price of the bond will rise above its face value. Such a bond sells “at a premium.”

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