The Simple Math: Hey, Baby Boomer, How Much Money Will You Need When You Retire?

Many of us baby boomers are lucky enough to have parents in their 80s and 90s.

Many of those folks retired when they were in their 60s, which means that many of them have had 30-year-plus retirements. During this time many of those folks have had the pleasure, brought to them by some good ol’ pension plan that came into their life when they were far younger, of receiving monthly checks equal to some portion — say, four-fifths — of the amount of their monthly salaries at the end of their careers. That, plus Social Security to fill in that one-fifth gap, has stood them in very good stead indeed. And then there was also a stock market and a real estate market that absolutely cranked out wealth during most of their lives. And all of those things had the nice quality of, over time, handily outpacing the inflation background.

So, baby boomer, how’s ’bout you? How’s that same thing looking for you?

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Here’s a simple way to think about it.

Say that you are part of a couple, and that the two of you spend $10k per month — so $10k is your monthly nut, which is financial-ese for the amount you typically spend in a normal month, including the one-off sort of spending that seems to occur, seemingly haphazardly, just about . . . oh . . . every month or so, which means that something out-of-the-ordinary picks something out of your pocket each month, which in turn means that those out-of-the-ordinaries are, at the end of the day/month/year, pretty darn regular and pretty darn ordinary and therefore part of your monthly nut.

So does a $10k monthly nut number sound crazy to you?

A $10k monthly nut number makes sense to a lot of folks living in the little city-by-the-bay I like to call Ess Eff Sea Eh, and is also a number which is very easy to eyeball, so we’ll use it here. But if that monthly nut number is way out of line for you because you live in more normal or more extraordinary places than Coastal Northern California, or because you have a more bare-bones or a more sumptuous lifestyle, then please discount it down or gross it up, as appropriate, as I work our way through the numbers down below.

And if you don’t know what your monthly nut is, why, then, you don’t know the first thing about what your current financial health looks like, let alone what your retirement is likely going to look like, and you most assuredly owe it to yourself to know it!

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Now ask yourself if you’re feeling lucky, because if you are, then you might live to be a very healthy, say, 95 or even 100 years (and since life is good, then the more years the better, with some notably rare exceptions . . . ).

In any event, let’s say that you are going to leave this mortal plane precisely thirty years after you stop working for a living — precisely thirty years after the first day on which you started looking at your stored-up wealth as the sole source you would turn to when you needed to replenish your spending money, rather than looking to cash you would be generating on an ongoing basis via your endeavoring and toiling and getting paid or otherwise making money from doing something. Because retirement is, after all, about doing nothing insofar as your money-making is concerned, right?

Then the quick ‘n dirty — and yes, simplistically dumb in some ways, but also hopefully simplistically illuminating — math is that you will spend $3.6 million during retirement.

(Aside for FinancialWonks also known as F-Wonks also known as fwonks: I hear your time-value-of-money anguish. Assume these are real dollars and, if you like, also assume further down that appreciations and asset-generated cashflows balance out real-life-spending inflation and lifestyle choices plus spending necessities. That is, assume that the pluses and minuses balance. The idea here is that through [over-] simplification can come illumination for non-fwonks.)

That’s $120k a year for 30 years.

That’s how much you will spend.

And where do you think that’ll come from?

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Let’s start with the givens — with the baseline amounts you’ll be receiving in retirement without you doing any extra-fancy footwork.

There’s Social Security (yes, I very much believe it will be there for you, and, no, it’s not a given in the giver/taker sense of the word).

And then there are the distributions you’ll have to take out of your 401k plans and your 403b plans and your IRAs and any other non-pension retirement plan which holds money of yours that has never been taxed (in John Friedman Financial parlance, these are TDAs or Tax-Deferred Accounts).

Because, when it comes to those never-before-taxed retirement accounts — those TDAs — once you’re 70 or so the government says, OK, now it’s time — time for all that money to be taxed, a little bit each year over the rest of your life, and to get it to be taxed we’re going to require that you take it out of the account, and treat it coming out of the account as money that you made that very same day it came out of the account.

So once you’re about 70 you’ll have to take money out of those accounts, each year like clockwork, to the tune of about 4% of your balance at the end of the previous year, with that percentage getting a bit larger each year. Those are the RMDs (also known as MRDs) you might’ve heard about (short for required minimum distributions and minimum required distributions).

And pay taxes on those RMDs you shall: deferred tax no longer deferred.

So those are the givens. Those are the dollars that come to you without you thinking or doing much (though if you do them right, the decisions as to when you start taking Social Security and the decisions about from where those retirement account distributions come, do, in fact, take some thinking and some doing).

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So say that the two of you will see combined Social Security payments of $4k per month and that you have a million-dollar IRA (again, we are using eyeballable figures here).

So that’s $40k a year that has to come out of your IRA to meet the MRD requirements and $48k coming to you from Social Security. And figure that the money coming out of your IRA will get taxed out the semi-wazoo while the Social Security money coming your way will get taxed . . . complicatedly, but nowhere near as highly as the IRA money gets taxed. And let’s say that that brings you about $75k of after-tax cash (again: we’re doing things quick ‘n dirty here).

Thirty years of that will get you $2.25 million, a bit less than two-thirds of what you will spend.

So this hypothetical couple — with what most would consider to be a big honkin’ IRA and a couple’a healthy Social Security monthly payments for the rest of their lives while they both shall live, so help them G-sh — would need to look to something beyond the million-dollar IRA and the $4k a month Social Security.

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A banker once told me that one of the first things she looks to when deciding whether to lend money to a small business person is whether that person has ever saved money other than via an employer-sponsored retirement account. Because, she said, having saved money the hard way, i.e., by actually having the money on hand and having chosen to ship it off to some place where it would be invested (a brokerage account, say), as opposed to having chosen to spend it right then and there, she judged that potential borrower to likely be capable of wisely spending the money the bank was considering lending to the potential borrower.

So have you ever saved money outside of an employer-sponsored retirement account? Have ya?

If you haven’t you’re normal. But normal ain’t so great in this situation.

Many, many baby boomers have some sort of retirement account (a 401k, an IRA, etc.) and a house with some wealth stored-up in it, but, other than that, zilch. They’ve never saved a dime, let alone a dollar, other than via a home purchase or a stash-it-away-before-you-get-your-hands-on-it automatic savings plan, i.e., they never saved a dime the hard way.

Because, as it turns out, on the whole, us human beings, quite unfortunately, are, when left to own devices, quite rotten at saving on our own.

It’s a good thing the government has stepped in, then, via the tax code and a pension plan known as Social Security, to try to make it easier for us to save, by short-stopping some of our earned dollars before they ever get to us, thereby making it all the easier for all of us to treat ourselves to a good retirement, eh?

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Still, those things are not enough for most folks, especially if you live in o near the little city by the bay and like to eat out and travel and such.

So you owe it to yourself to be a better-than-average saver — especially if your current monthly nut is five times (or more) greater than the amount of the Social Security check you’ll likely be receiving way out there, off on the horizon, where the retired you lives, either financially happily-ever-after . . .  or not.

It’s a math thing . . .


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  1. Posted by Nancy Donovan on Tuesday, February 5, 2013 at 11am
    Alrighty, then! It's a math thing. Save, save, save. With two kids? Edu-ma-cation is a good thing. Going to work on this WITH the kiddos.
    Thanks for an always informative read.
    The banker anecdote is great...