Savings illusion

wealth-illusion

Will I have enough for retirement?

It’s one of the most stressful, and complicated, financial questions we face in life and the data show that most Baby Boomers and Gen- Xers have inadequate savings.

The Baby Boomer (born from 1946 to 1964) and Gen X (born from 1965-1984) generations are in a jam.

 

wealth-illusion

 

 

Savings Crisis

Only 47 percent of Boomers and 27 percent of Gen X-ers have saved $150,000 or more, according to one study.

With only 26 percent expecting income from an employer-provided pension in addition to Social Security, these are hardly impressive levels of savings.

 

Source: Insured Retirement Institute

Source: Insured Retirement Institute

 

 

Wealth Illusion

We also might be thinking about our retirement savings in the wrong way, according to an interesting article in the Wall Street Journal.

We tend to keep track of our retirement savings in lump sums rather than in terms of monthly income we can live on over a 20 to 30-year retirement period.

Having $1 million in your 401(k) plans sounds comforting, but that works out to $5,000 a month to live on during retirement.

 

Perception Gap

For some, that might be enough depending on other assets and social security. For others, it might not.

The point is to think in terms of monthly income and what sort of lifestyle one aspires to in retirement.

One way to do that math is to consider current annuity pricing formulas.

As the Journal points out, “monthly annuity payments are about 1/200th of the corresponding lump sum, assuming they begin at age 65.”

 

Takeaway

To get a monthly income stream of about $8,000, you’d need about $1.6 million in lump-sum.

You might be suffering from a wealth illusion if you don’t dig deeper into the numbers.

In my opinion, the best way to avoid those 4 a.m. panic attacks about whether you have enough tucked away for a comfortable retirement is to invest some time in planning.

Photo Credit: Sarah Beach via Flickr Creative Commons