The numbers coming from the money press about how well Americans are prepared for retirement are all over the boards.
Depending on who you read and who they are writing for and, in many cases, their politics, the predictions range from Armageddon to not too bad.
A recent Barron’s article stated that people without access to employer-sponsored retirement plans are the worst prepared of all.
According to the EBRI (Employee Benefit Research Institute), 73% of those without a plan have less than $1,000 in savings and investments.
Other reports I have seen have stated these numbers are way too negative. It really isn’t that bad.
The EBRI also says about 86% of Americans in the top 25% of pre-retirement income will have enough money to cover 80% of average daily expenses in retirement.
Another group puts it at 40% of the top earners, but both sets of numbers assume 80% of expenses, not 100%. No mention of where the other 20% is to come from or the other 14% of the top quartile earners.
But despite huge disparities in the research, there are two things just about everyone does agree on.
If you have to have a financial setback in retirement, it is best to have it later in life. A setback can include an unexpected expense, a big drop in the market or anything that costs a lot of cash.
At first that sounds a little stupid, I know. How do you arrange for the market to drop or for a big expense later in life rather than earlier?
The answer is quite good.
Have at least one to two years of expenses available in cash so you don’t have to sell investments at a loss during a crisis or a down period.
According to the research, it is almost impossible to recover completely from a big, early loss in retirement. So, not having to liquidate at losses can make the difference.
Second, and this is one that has never made sense to me, you can withdraw more than 4% a year… most money writers are recommending. I have always thought 4% was too low!
T. Rowe Price says if you adjust your withdrawals for the broad market valuation, you can take out as much as 6.8%. The number I used to quote to my clients was 7%.
In other words, if stocks are cheap, around a 10 P/E (price-to-earnings) for the S&P, you can take out more. But when they get pricey, you have to be more conservative. But 4% is ridiculous.
But no matter who you read or what you choose to believe, the real keys to success are to save early and often and have enough cash on hand to protect yourself from losses early in retirement.
Cover those two bases and you don’t have to worry about who’s right. You will be.