Crunch Your Own Numbers

As baby boomers rumble toward retirement—or perhaps more accurately, toward retirement age—they’ve started to focus more on something called “The Number.” This number is the ethereal amount of money your nest egg must contain in order for you to have a happy and financially secure retirement. The Number is also the title of a heavily promoted yet ultimately ordinary book written by Lee Eisenberg and published in 2005. Eisenberg never does give you The Number.

Of course, there is no magic number, because everyone has different needs and wants, and styles of living change over time. But one thing is for sure: Most people don’t have enough money to retire. The Employee Benefit Research Institute’s 2006 Retirement Confidence Survey offers plenty of data to support that.

For instance, more than half of workers saving for retirement report having less than $50,000 total in savings and investments, not including the value of their primary residence or any defined-benefit plans. Worse yet, the large majority of workers say their assets total less than $10,000.

According to the survey, only 40 percent of workers say they or their spouse have a defined-benefit plan, yet 61 percent say they expect to receive income from such a plan in retirement. Nearly 40 percent of workers expect to receive health insurance from their employer in their retirement years, but that benefit, for many, is going away.

Expectations are not aligning with reality, it would seem. But here’s the corker: A majority of those surveyed say they want a standard of living in retirement that’s the same or better than they had in their working years, but they also think they can maintain a comfortable retirement on 70 percent or less of their pre-retirement income. Huh?

Needless to say, as a group, we have some goofy ideas about retirement. Is there a more sensible way to approach this whole subject? As a matter of fact, there is.

While the following rule of thumb cannot replace a good financial plan, here is one formula that may at least help you get started. It’s called the “4 percent withdrawal rule.” The rule was developed by William Bengen, an independent financial planner in San Diego. It’s somewhat like the formulas that large endowments or foundations use to fund their programs.

Based on his research of actual stock returns and retirement scenarios over the past 75 years, Bengen found that retirees who draw down no more than 4 percent of their portfolios every year stand a great chance that their money will outlive them. (Of course, this is based on a nest egg of reasonable size.) Retirees who draw down 5 percent a year run a 30 percent chance that their nest egg will expire before they do. Those who pull down 6 percent to 7 percent take a significant risk that they’ll run out of money before they die.

Bengen’s research takes into account worst-case scenarios such as prolonged bear markets, periods of high inflation, and down markets. And it’s based on a portfolio invested in 50 to 75 percent stocks.