Robert Powell wrote an interesting article in USA Today this week, where he summarized some recent research of David Blanchett, Michael Finke and Wade Pfau.
The summary of his summary is… you’ve got to save more.
5% of your salary won’t cut it. 10% won’t cut it. Even 15% of your salary every year from age 25 to age 65 might not cut it. The bottom line is that retirement keeps getting more expensive for people.
The reasons boil down to 1)Lower expected real (inflation adjusted) returns now and in the future, and 2)we are living longer. By the way, they didn’t mention this, but there is also a large probability that you will receive less from Social Security in the future.
We don’t know the future, but we can see that stocks are near their high (price) relative to their earnings. Since earnings are the engine that drives the long term price of stocks, and stocks usually revert to their long term mean, there is room for growth, but probably not at the same rate that occurred in the past few decades. And as inflation returns to normal levels, we will likely see that your real returns will be a few percentage points lower than historical norms. This means that whatever we save will grow more slowly, and that the amount we will be able to take out during retirement will be less as well.
Oh, and by the way, we are living longer, so we will need more money, not less.
And then there is the Social Security issue. Current proposals in congress look to “solve” the issue for the next 75 years. But if you read the fine print, what they really mean is that you will get less in retirement. And the younger you are today, the less you will get in retirement.
What does all this mean?
Well, we need to take care of ourselves. And we need to be more frugal and intelligent in how we do it. So increase the amount you are saving, and do it today. Find a second job to generate investing income and invest all of it. And take care of yourself, because you might need to work a few extra years.
What’s the upside? Well, if this doomsday scenario doesn’t come to fruition, you will be in great shape to enjoy a fantastic financial life. And if it does, you are still okay.