Conference nyoss1::market_investing

742.0. "Retirement Savings" by STOHUB::SLBLUZ::WINKLEMAN (take a byte out of crim!) Wed Jul 13 1994 13:54

The question of retirement comes up regularly here, so here's an article which
addresses some basic questions.
This article appeared in the WSJ last year in the "Your Money Matters" column.  
There are two tables and an article; I will post the tables as reply 1.


	Figuring Needs for Your Retirement Can Become a Job in Itself
	By Jonathan Clements

	Saving for retirement is tough.  Figuring out how much you need to save
can be even tougher. 

	"It is like trying to hit a moving target while blindfolded," says
Steven Norwitz, a vice president with T. Rowe Price Associates, a Baltimore
mutual-fund company.  "The only thing you know for sure is that it's a high
price tag." 

	Is there a shortcut?  Take a look at the tables that accompany this
story, which were put together by T. Rowe Price at the request of this
newspaper.  The tables aim to give you a rough idea of how much you should save
each year for retirement. 

Figuring Future Income

	Here's how to use them.  Start by considering what you're likely to get
from Social Security and whether you will receive money from a traditional
company pension plan, one that pays a certain "defined benefit" that's related
to your salary and years of service. 

	Many employees won't receive a traditional pension.  Instead, employers
are switching to "defined contribution" plans, such as 401(k)s.  With these
plans, the amount of money you have in retirement depends on how much you and
your employer contribute each year to the plan and how astutely you invest the
money. 

	Social Security can be a signigicant source of retirement income if you
retire later or have relatively modest needs.  In 1994, for instance, the
maximum Social Security benefit will be $20,640 for a couple applying jointly
and $13,764 for an individual, presuming you take Social Security at age 65. 

Penalty for Early Retirement 

	But your benefits will be 20% lower if you apply for Social Security at
age 62, the first year of eligibility.  And if you retire even earlier, you
will initially have to pay your entire living expenses without any help from
the government. 

	Once you've got a handle on your likely income from Social Security and
your company pension, consider how much additional money you'll need.  You
might not be covered by a  company pension,for instance, but you figure that
Social Security will replace about 20% of your salary.  In retirment, you want
to have an income equal to 70% of your current salary, so the additional money
-- 50% of your salary -- will have to come from your savings, including money
socked away in 401(k) plans and individual retirement accounts. 

	If 50% is your goal, how much do you need to save each year?  Take a
look at the first of the two tables, "Step No. 1."  It tells you how much you
need to save, depending on how far away your retirement is.  If you are 20
years from quitting the work force and looking to replicate 50% of your current
salary, the first table suggests a 22% annual savings rate, presuming you don't
currently have any savings. 

	But many people, especially those closer to retirement, will already
have a substantial sum stashed away.  To adjust your savings rate for money you
already have saved, go to the second table, "Step No. 2." 

	Suppose your savings equal twice your current salary.  If you want to
retire in 20 years, the second table suggests you can reduce the 22% savings
rate you got in the first step by 16 percentage points.  Thus, your annual
savings rate, adjusted for your current savings, would be 6%. 
	
Return on Investments

	Figures like this, of course, are only as good as the assumptions
they're based on.  The tables assume that your investments earn 9% a year in
the period prior to retirement and 8% annually after retirement, with inflation
running at 3% a year.  Thus, to make the numbers in the table work, you need to
earn 6% a year more than inflation before you retire, and 5% above inflation
afterward; these are pre-tax rates of return. 

	During the past 20 years, you could have earned 6% more than inflation
by dividing your money equally between stocks and bonds, while a 5% annual gain
would have been possible with 30% stocks and 70% bonds, says William John
Mikus, a managing director with Financial Design, a Los Angeles investment
adviser.  In both cases, the stock component includes a healthy dose of U.S.
small-company stocks and foreign stocks. 

	"Given that the next 20 years are unlikely to mirror the past 20 years,
you can't expect to get the same rates of return with those mixes," says Mr.
Mikus.  To earn 6% and 5% a year more than inflation, you will probably need
"to have a slightly more aggressive allocation, by putting more into stocks. 
For instance, a retiree might want to have as much as 50% in stocks." 

	Those who aren't willing to invest so heavily in stocks will either
have to save more or plan on a shorter, less comfortable retirement.  "If
you're not inclined to invest [in the stock market], you're either going to
have to delay retirment or spend less," says Kenneth Klegow, a financial
planner in Lansing, Mich. 

	The two tables also assume that your portfolio pays you an income that
rises each year with inflation, through a retirement that lasts 30 years.  At
the end of the 30 years, your portfolio would be entirely depleted. 

	A retirement streching out over 30 years may seem unlikely, espeically
if you retire at age 65,.  But when Mr Klegon puts together financial plans for
65 year olds, he presumes that men will live until age 90 and women until age
95.  The mortality tables indicate that only 15% of 65 year olds will live
beyond those ages. 

	Moreover, if you quit the work force at age 55 or 60, the assumptions
in the tables suggest that your money will run out when you turn 85 or 90. 

	"If you retire at age 55, you may want to save more" because of the
chance of living beyond age 85, says Mr. Klegon. 

	The consequences aren't necessarily dire if you do outlive your
savings.  Mr. Klegon notes that many people can tap into the equity in their
homes through a reverse mortgage or by moving to smaller homes.  In addition,
"you'll still have Social Security coming in, and your pension might be coming
in as well," Mr. Klegon says. 

	"And as we age," he adds, "we typically spend less money.  At some age
-- say age 80 -- our spending slows down, we go out less, we go on less trips."

	The tables hold some important lessons for those saving for retirment. 
"The clear implication is that you have to start early and be disciplined if
you're going to meet your retirment needs," says T. Rowe Price's Mr Norwitz. 
Somebody who is 35 years from retirement can replicate 70% of his or her salary
by saving just 10% a year.  But by waiting until you are 25 years from
retirment, the necessary savings rate jumps to 21%. 

	Retiring early is the professed desire of many, yet the tables indicate
it's enormously difficult to do in practice.  "The difference between retiring
at 55 and retiring at 65 is huge," says Robert Bingham, an investment adviser
with San Francisco's Bingham, Osborn & Scarborough.  "you have 10 more years
that your assets have to work for you" if you retire at age 55, as well as 10
years less to save. 

	Conversely, delaying retirement can make a huge difference to the
amount you need to save each year.  "For every year you delay your retirement,
there's a two-sided benefit," says Mr. Klegon, the financial planner.  "There's
one year less you'll be retired. And there's one more year to save for
retirement and to let your savings grow." 

	In using the talbes, be realistic about how much you can save, says Mr.
Norwitz.  "If your children are out of collegs and your mortgage is paid off,
you might hit a savings rate in excess of 20%," he says.  "But most people 
should think in terms of a 15 goal, through a combination of their own savings
and employer contributions to things like 401(k) plans." 

<end of article>

             How Much You Need to Save Each Year for Retirement
Step No. 1
Decide what percentage of your annual salary you will need in retiremnt, on top
of traditional company pension, if any, and Social Security.  Then use this
table to find the percentage of salary you need to save each year, depending on
how long you have until retirement. 

 Desired retiree
 income as a 
 % of annual
 salary            Years to Retirement
               10   15   20   25   30   35
               --   --   --   --   --   --
    30%        36%  21%  13%   9%   6%   4%
    40%        48   27   18   12    8    6
    50%        60   34   22   15   10    7
    60%        72   41   26   18   12    9
    70%        84   48   31   21   14   10

Step No. 2
Adjust the required savings rate to take account of your current savings by
finding the appropriate number in this table and subtracting it from the
percentage determed in Step 1. 

Current savings
as a % of
annual salary       Years to Retirement
               10   15   20   25   30   35
               --   --   --   --   --   --
   100%        13   10    8    7    7    6
   200%        25   19   16   14   13   13
   300%        38   29   24   22   20   19
   400%        51   38   32   29   27   25
   500%        64   48   40   36   33   32

Example:
If you are 25 years from retirement and want a retirement income equal to 70%
of your salary, the first tables suggests you need to save 21% a year.  But if
you already have savings equal to 200% of your salary, you would reduce that
number by 14 to get a 7% annual savings rate. 

Note: Tables assume 9% annual investment gains prior to retirement; 8% annual
gains after retirement; 3% inflation; retirment income must last 30 years, at
which point your portfolio is depleted. 
Source: T. Rowe Price Associates