How Much is Enough?

With the S & P 500 down more than 45% since October 2007, virtually every U. S. investor is holding a portfolio that has shrunk dramatically. Many boomers are asking themselves if they will ever recover their losses or be able to save enough to retire in their old age.

It all comes down to one question -- how much do you really need to maintain your desired lifestyle in retirement?

There has been a fair amount of academic research to determine how much you can continually withdraw from a portfolio over 30-35 years -- the length of the typical retirement these days. Based upon the range of historical returns in a diversified portfolio (pre-2008) a safe annual withdrawal rate is 4%-4 .5%, adjusted annually for inflation. In dollars that means that you can safely withdraw $40,000 - $45,000 from a $1 million portfolio in year one. In year two, if inflation is 3%, your withdrawl will increase to $41,200 - $46,350.

If you are spending $135,000 now and hoping to sustain the same lifestyle through 30 or more years of retirement you need to accumulate an investment portfolio of approximately $3 million unless you have a pension or other source of income in retirement.

Most people find this breakdown sobering, if not completely depressing -- and it doesn't even account for the likelihood that your savings are in pre-tax dollars (if they are in your 401(k), IRA or other retirement account). We'll deal with that gloomy aspect of the issue on another day.

The bottom line, for most of us in middle age, is that retirement, in the tradional, gold watch, puttering away your days in the garden or on the golf course model of the past is not in the future for us. But it's also true that it wasn't a realistic scenario even before the bottom fell out of the stock market in 2008!

Relatively few people had saved enough to achieve full retirement at age 60 or 65 . We have been a nation of spenders for years now -- almost no one, especially in the baby-boom generation-- has been able to pare back current consumption so that they are living a lifestyle they can reasonably sustain in retirement just by saving diligently. Most of the lucky few who are well-positioned for retirement received a windfall: an inheritance, stock options that paid off handsomely, or a cash settlement from a lawsuit or the sale of a business.

So don't beat yourself up. Retirement may not be a reality -- but work keeps us vibrant and engaged. You may not be golfing or fishing every day, but you can probably slow down and find work that feeds your soul and supplements your savings. That's the view we're taking.

Annette

Copyright 2009 The Money Dames