With the 401(k) generation beginning to retire, it begs the
question:
Is your savings going to be enough?
(If you're already retired, check out the
Retirement Ten Commandments
.)
The Center for Retirement Research at Boston College doesn't
seem to think so. According to a recent Yahoo!
article
by E.S. Browning, "The retirement savings plans that many Baby
Boomers thought would see them through old age are falling short in
many cases."
The study, conducted by the Center for Retirement Research,
compiled data from the Federal Reserve to analyze the 401(k)
balances and annual salaries of those age 60 to 62. They assumed an
average annual retirement income need of $75,000, and found that
the median household with a 401(k) account has "less than
one-quarter of what is needed in that account to maintain its
standard of living in retirement."
We have always defined wealth as the ability to sustain your
desired standard of living indefinitely over time without work or
worry. It is
not
defined by the number at the top of your account statement. Your
401(k) account value will fluctuate up and down as the market does,
so this number is not a true representation of your wealth. The
amount of cash flow your portfolio can produce to pay your bills,
on the other hand,
is
the number you should be paying attention to.
Experts estimate Social Security will provide as much as 40% of
pre-retirement income, or $35,080 a year for that median family. If
the average household needs $75,000 in retirement, that leaves a
$39,920 gap that must come from other sources. According to the
study, "most 401(k) accounts don't come close to making up that
gap."
Those who are lucky enough to receive a pension will have it a
little easier, but what do these 401(k)s look like? The Center for
Retirement Research reports that the median 401(k) plan held
$149,400, including plans from previous jobs. Surprisingly, the
study did not use the industry-standard
4% withdrawal rate
to make income calculations, which we have always believed to be
erroneous. To figure the annual income provided from the median
401(k) account, analysts examined what the family would receive
from a fixed annuity.
The fixed annuity figures were based on a product from New York
Life, a long-standing and well-known insurance company. According
to New York Life, the average 401(k) would generate just $9,073 a
year for a couple, which is less than one-quarter of the shortfall
mentioned above. Not only is $9,073 a year insufficient, but a
fixed annuity does not answer the issue of rising costs in the
future. Since the amount remains the same, it will become worth
less and less as inflation grows.
But what if you could take that same amount in the 401(k)
account and increase your annual income compared to what the fixed
annuity gives? What if you could create a 12% yield in real cash to
pay your bills each month without losing purchasing power or
touching your principal? You don't have to lock yourself into a
low-yielding fixed annuity. You don't have to sell assets at a loss
and incur
reverse compounding
.
There are better alternatives to reaching your financial goals,
such as a cash flow strategy like the Snider Investment Method®,
which may mean that the
value
of your 401(k) is not as key to your retirement success as the
Yahoo! article implies. The article offers some insight to help
pre-retirees meet their goals -- save more, work a little longer,
refine your budget -- but with the right
investment strategy
, you may be closer to retirement than you think.
The intent of this article is to help expand your financial
education. Although the information included may be relevant to
your particular situation, it is not meant to be personalized
advice. When it comes to investing, insurance and financial
planning, it is important to speak to a professional and get advice
that is tailored to your unique, individual situation. All
investments involve risk including possible loss of principal.
Investment objectives, risks and other information are contained in
the Snider Investment Method Owner's Manual; read and consider them
carefully before investing. More information can be found on our
website or by calling 1-888-6SNIDER. Past performance is not
indicative of future results.
The 1% yield objective of the Snider Investment Method is a goal
and not a guarantee. The yield calculation is different than the
total return calculation typically shown by most in the investment
industry. The percentage yield is realized gains as a percentage of
the amount invested. The yield is approximately equal to the total
return if and when a position closes. While the position is open,
there is typically some amount of unrealized loss. The total return
measurement would include these losses and so would be lower than
the yield. While the rules of the Snider Method prohibit selling
stocks at a loss, this does not limit or prevent the accumulation
of unrealized losses. Nor does it guarantee that a position will
eventually close or that unrealized losses won't persist
indefinitely.