I have recently been doing some investment planning for my grandmother. The general rule for retirement is that you have a pile of money saved up and you can spend 5% of it every year.
So you take your yearly expenses for your lifestyle and subtract your social security payment (or assume it will be zero) and your pension (if you have one). This amount is the 5% of your savings needed which lets you figure out how much you have to save. For example, if you have $100,000 saved then you get to spend $5,000 a year which is less than $420/month.
The Employee Benefit Research Institute just released their annual survey on retirement savings which makes for some interesting reading. It sort of makes one wonder what will happen to the economic-treadmill when millions of Boomers suddenly have to stop buying because they are totally broke.
Workers' Views On Retirement May Be Too Rosy
April 4, 2006
Despite recent moves by large companies to freeze pensions and chip away at retiree-health benefits, Americans remain confident -- if dangerously naïve -- about their retirement prospects, according to new research.
Many workers are counting on traditional pension plans to pay their bills in retirement, even though such plans are fast disappearing. Only 40% of working couples currently are covered by pension plans, but nearly two-thirds of surveyed workers -- 61% -- expect to get income from such a plan in retirement, according to the Retirement Confidence Survey, scheduled for release today by the Employee Benefit Research Institute, a Washington nonprofit, and others.
Many workers are underestimating the income they would need to live equivalently when they quit their jobs, the study found. Half think they can maintain a comfortable retirement on 70% or less of their pre-retirement income. "Our rule of thumb is that you need an 85% [income] replacement ratio," says Dan Houston, a senior vice president for Principal Financial Group of Des Moines, Iowa, one of the survey's sponsors. "You're seeing people who are woefully underfunded."
