How much money do you need to save for retirement?
That's always been a tricky question. And now, given the stock-market slide of the past couple of years, even those who once knew the answer must wrestle with something more:
What's it going to take to recover? How can I still get the standard of living in retirement that I had expected back in the '90s, when investments were soaring and the good life -- perhaps even early retirement -- seemed a sure thing?
Apparently, most investors think they're in better shape than they are. A recent survey done for the Charles Schwab brokerage by Harris Interactive found that 64 percent of those ages 45 to 65 were confident they'd be able to afford a comfortable retirement -- maintaining the standard of living they'd had in their working years.
But when the respondents, people with household incomes of at least $75,000, were told what it actually would cost to meet that goal, only 32 percent remained confident they'd get there.
That reality check involved a Schwab rule of thumb: that it would take $230,000 in retirement savings, in today's dollars, to provide every $1,000 needed in monthly income during retirement. To enjoy a $75,000 "annual income in retirement ($6,250 per month), you'd need $1.4 million in savings.
Of course, if you won't retire for 10 years, then it will take about $310,000 in savings to produce every $1,000 per month in retirement income, assuming a modest 3 percent inflation. That means you'd need just under $2 million to get $75,000 a year.
How can the figure be so high? Because it has to last a long time. If you retired today and started drawing $1,000 a month from a $230,000 nest egg, the money would be gone in 230 months -- about 19 years. Schwab assumes that investment returns would help stretch that period and allow you to gradually take bigger withdrawals to keep up with inflation.
Perhaps Social Security and a pension will cover part of your retirement needs, reducing your savings requirement. But the figures are indeed sobering.
So let's assume that after Social Security and pension, you'll still need $2 million. Assume you'll retire in 20 years -- and that you haven't saved anything. Better get going, because you'll have to set aside about $4,000 a month and get a 7 percent annual investment return to meet your goal.
Now let's look at how the stock market decline of the past two years has hurt people's retirement prospects.
Assume it's March of 2000 and you're well on your way to a comfortable retirement. You have 20 years to age 65, your retirement investments are worth $250,000 and you're counting on a 10 percent annual return, which seems modest by late-'90s standards but is about average for the 20th century.
To meet the $2 million goal in 20 years, you'll need to continue setting aside about $450 a month.
Move forward to September 2002. The 42 percent market decline of the past 30 months has knocked your $250,000 portfolio down to $145,000. Now you have 17 1/2 years to your planned retirement date, and you should probably assume a more modest rate of return such as 7 percent.
What will it take to get that $2 million retirement portfolio? Hold on to your seat -- you'll have to save about $4,000 a month. No, I didn't misplace a decimal point. Your monthly savings will have to jump from the $450 in your year-2000 plan to $4,000 -- the result of starting with less money, a lower rate of return and less time.
Can't do it
Obviously, many people will find it impossible to save this much. After all, this is just retirement savings. You may also be saving for kids' college.
So what do you do?
First, don't give up hope. Perhaps the market will snap back and do better than the 7 percent we'd assumed. (Of course, it also could do worse.)
Second, remember the old saying about how luck favors the prepared. If you keep plowing money into your investments, you'll get more out of any future rebound.
Finally, you should put together some realistic numbers of your own. While the calculations I've done here assume you'll need the same income in retirement that you have now, that might not be the case. Perhaps your home will be paid for and you'll no longer need to set money aside for college or retirement. If your income declines, your tax rate will, too. And you might want to move someplace cheaper, freeing up money from your home and reducing your home-related expenses.
There's also the option of working a bit longer, or working part-time after you "retire."
You don't need to be a financial whiz to play with all these numbers, nor do you have to spend a bundle hiring a pro. I used some planning functions in Quicken, the financial software that goes for about $50. Other programs, such as Microsoft Money, have similar functions.
There's no question that the bear market has undercut millions of Americans' retirement prospects. Many of us will never achieve the prosperity we'd dreamed about a few years ago.
Still, one thing is certain: The more you put aside, the better off you'll be.
XJeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at email@example.com.