By Albert B. Crenshaw
Sunday, April 2, 2006; F05
A recent survey by a brokerage firm found that 58 percent of Americans contemplating retirement don't know how big a nest egg they need to assure themselves of a comfortable life in old age.
That's no surprise. What's surprising is the 42 percent who think they do know.
"Who are they? Do you know any of them?" joked economist Alicia H. Munnell, who heads Boston College's Center for Retirement Research and who has been studying retirement security for years.
Increasingly, Americans are being asked to know the unknowable. Anyone who thinks that a) there's a specific amount of savings or assets at which a comfortable retirement is assured or b) that such a figure could be calculated if it did exist, just hasn't taken a realistic look at all the variables.
Clearly, families with assets in the millions of dollars can feel reasonably confident about their futures. At the other end of the spectrum, those with little besides a house and Social Security are almost certain to face lowered standards of living in retirement. But in between, it's a conundrum.
Brokers and insurers and others who sell retirement "products" like to put firm-sounding numbers on what constitutes retirement security, but they typically do that by making assumptions, lots of them. This is not to say that these assumptions are unreasonable, but families should understand that their own situations could end up quite different.
For example, the estimates done by the pros typically assume your assets will get a certain average return, that you'll withdraw a certain percentage each year -- and that may be adjusted for inflation -- and that you'll live to something like your actuarial life expectancy, which is something in the low to mid-eighties, plus perhaps a fudge factor based on your family history and present health.
So assuming you save a certain amount, and if you get the assumed investment return, and if you don't take out too much, and if inflation doesn't take off, and if you don't get a horribly expensive disease, and if taxes don't rise too much, and if you die on schedule, you'll be okay.
This is not reassuring.
To be sure, retirees have always faced uncertainty. Even back in the good old days of memory (or maybe imagination), when many more Americans had traditional pensions, sudden changes, such as roaring inflation, sometimes wrecked retirees' plans.
But in today's world, and tomorrow's, retirees face an even greater array of uncontrollable factors. Indeed, even the experts can't offer guidance with much confidence.
For example, Munnell said her and her colleagues' research indicates that retirees likely need 70 to 80 percent of their pre-retirement income to maintain their standard of living after they stop working. An easy way to think about this is to set your savings goal as a multiple of your annual income just before retirement. The answer Munnell and her colleagues have come up with is that your retirement assets should total five to six times your final income.
In other words, if you made $90,000 your last year on the job, your retirement savings should be between $450,000 and $540,000.
But Hewitt Associates, a big benefits consulting firm, figures that the replacement figure ought to be 85 to 90 percent of pre-retirement income, and only retirees with employer-sponsored medical insurance will be able to get by on that. Hewitt figures that for retirees without employer coverage, medical costs alone will equal about 20 percent of pre-retirement income, so if you start with resources equaling 80 percent of pre-retirement income and don't have medical, you're already short 10 or 20 percentage points.
Munnell called medical costs "a wild card . . . so out of control" they are "almost impossible to think about."
"I don't even know how you plan" for medical costs, she added. "The system is imploding. We are going to have some dramatic change."
At the moment, though, we don't know what that is, and with Congress seemingly unable to reach agreement on any really tough issue, it may be a long time before anything meaningful is done.
The conclusion to draw from this is not to throw up your hands. It's to stop trying to figure out what you'll need, and simply save as much as you can.
The people in worst shape are those in mid-to-late middle age who have little savings and no traditional pension (or a traditional pension that has been frozen). These folks need to begin a concerted savings program, taking full advantage of their 401(k) or any other tax-preferred retirement savings vehicle. If that is maxed out, and there's money left, consider a Roth IRA if you're not over the income limit ($160,000 for a married couple). Roth IRAs are funded with after-tax money, but withdrawals in retirement are tax-free.
The people best positioned to come out all right are the young -- but only if they begin saving now, and keep to it faithfully.
And here's a reminder for today's parents and grandparents: When your teenaged child or grandchild goes out and gets a summer job, fund a Roth IRA for him. Annual contributions are limited to earnings or $4,000, whichever is less. You can't expect the child to sock the hard-earned cash away for 40 years, but you can open the account and fund it with a gift up to the limit. Pick a good mutual fund, and then let it ride. Repeat the process every year the child works if you can afford it. It's amazing what this can compound into, including a good lesson on the benefits of saving.
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Alarmed about reports of taxpayers receiving phony e-mails claiming to be from the Internal Revenue Service, the agency has set up an electronic mailbox to which suspicious e-mails may be forwarded.
The box is phishing@irs.gov , but the IRS recommends that you first go to http://www.irs.gov/ for instructions. When you reach the IRS site, enter the term "phishing" in the search box in the upper right-hand corner. Then open the article "How to Protect Yourself From Suspicious E-Mails" to find the instructions. The agency says that following these instructions will help ensure that the bogus e-mails retain critical elements found in the original. The IRS can use the information, URLs and links in the bogus e-mails to trace the hosting Web sites and try to shut them down.
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The average annual cost for a private room in a nursing home nationally has hit $70,912, or $194 a day, according to insurer Genworth Financial Inc. That's up 2 percent over the past year. A private, one-bedroom unit in an assisted-living facility averages $32,294 a year, and the average hourly rate for home health aides is $25.32, a 13 percent increase over a year ago.