HOW MUCH MONEY WILL IT TAKE TO RETIRE? THE figure you hear the most often is a nice, round $1 million, and it probably depresses you. Most people will never acquire such a luxurious account. If it makes you feel any better, $1 million 20 years from now is ""only'' $550,000 in current dollars--but that might also sound like a figure from la-la land.
Luckily, you won't need that much in savings, unless you're feeding country-club tastes. Just ask the retirees you see around you. They're sitting comfortably in the middle class on savings of considerably less. Your life shouldn't be very different from that.
So where does this famous $1 million estimate come from? To find out, the reporter for this column, Temma Ehrenfeld, 36, put her finances on the line. She called firms that advertise retirement planning and asked them for help. She didn't disclose that she was working on a story, but went to appointments armed with her real-life personal finances: salary, vested NEWSWEEK pension, 401(k) plan and the savings outside her 401(k). The advisers ran her data through their computer programs. Bottom line, she asked for the answer to a single question: ""How much should I save to be sure I'm going to be OK?''
Slot machines: The results show an industry whose computers might as well be slot machines. She got wildly different and apparently random answers, based on assumptions that weren't always relevant to her life. One adviser told her she had to save an extra 30 percent of her salary. Others concluded that she's already saving enough. Their estimates of how much she needed ran as high as $1.5 million. These computers ought to be recalled. They're a hazard to our mental health.
Temma did discover why some planners say you need $1 million. They assume that you're financing your retirement solely out of personal savings, with zero income from Social Security or employee benefits. To me, that's irresponsible planning. Fashionable thinkers pretend that Social Security won't pay--but it will, as the current debate in Washington makes clear. As for employee benefits, what's vested is yours. It won't go away.
You might want to test a retirement projection with and without future employer contributions, just in case you're fired tomorrow. But most of the ""experts'' Temma saw dismissed her benefits out of hand. That had the handy side effect of requiring her to save extra money, which the experts would be happy to manage for her.
Here's a precis of what the advisers said. You be the judge.
1. What Hank said. Hank, a financial planner, has a ""fee only'' practice--charging fees for his time in lieu of taking sales commissions. Temma found him by calling the International Association for Financial Planning in Atlanta, which sends out free biographical data on planners in your area. They talked for an hour and a half, at $125 an hour.
Hank concluded that Temma did indeed need the famous $1 million to retire at 65. He said that would take an additional $1,400 a year, on top of what she's saving now. But his calculation ignored her NEWSWEEK pension, the money NEWSWEEK adds to her 401(k) (a fat 110 percent of whatever she contributes) and her Social Security. Benefits like these are what most Americans retire on.
2. What Harold said. Harold, of Salomon Smith Barney, thought Temma should retire at 60 and at a higher standard of living than she has now. His projections counted Social Security, made a rough (inaccurate) entry for future 401(k) contributions and--voilà!--produced $1.5 million as her retirement ""need.''
Harold was hungrier than Hank. His computer told Temma she ought to save an extra $13,000 a year--in his firm's IRAs, of course, not in NEWSWEEK'S 401(k) plan. A second computerized proposal suggested she save three quarters of her annual pretax salary--proving that his computer has a sense of humor.
3. What John said. John, of Morgan Stanley Dean Witter, advised Temma to treat her 401(k) as if it were ""gravy'' and figure her retirement without it. His computer put her savings target at $650,000 if she quit at 65--a sum attainable, he said, by investing an extra $1,300 a year. (John, by the way, was so hazy on 401(k)s that he couldn't describe them correctly. Temma let him off the hook.)
4. What Mike said. Mike is an insurance agent for Guardian Life Insurance. Temma found him by following up on a Guardian ad for financial plans. She told Mike she didn't want insurance (she's single, with no dependents). He assured her that he also offered ""traditional planning.''
Why am I not surprised at what happened next? Mike ""proved'' that 401(k)s were a waste by greatly inflating the tax she'd owe when she took the money out. Most people, he said, should ditch these plans and put their money into--yes--life insurance, instead. Temma's 401(k) is so terrific that, in the end, he had to concede it was actually ""a little'' better than the policy he was touting. So he urged her to buy insurance with her outside savings, instead. Mike made no effort to estimate what Temma would need to retire on. He calls his service ""Personal Financial Engineering.'' I call it garbage.
5. What Tom said. Tom, of Merrill Lynch, ran Temma through a computerized plan costing $175. It covered all her potential future income, including employee benefits. Tom concluded that Temma is already saving enough to retire at 65.
6. What two mutual funds said. Vanguard and T. Rowe Price put Temma's data through their computerized retirement planners. Their projections differed substantially (a reminder that we're not dealing in ""truth''). But both also showed that she's saving enough.
7. What a trusted planner said. The late John Allen of Arvada, Colo.--whose computer I'd follow anywhere--died suddenly, while working with Temma, and is much mourned. He'd concluded that she's saving more than she has to, and could quit before 65.
With four projections in essential agreement, that's probably the answer. But if Temma had stopped with Hank, Harold or the first John--whose computers are on steroids--she'd have come away scared of retiring broke. Most boomers do indeed need more savings, but that's no excuse for ""experts'' to fudge about how much.