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The Cargo Cult of Business » More Retirement

More Retirement

Published on 13 Jun 2006 at 11:22 pm | No Comments | Trackback
Filed under The Cargo Cults of Business, Principal Acronyms Only, Winners and Losers, Economics and the Economy.

This story via EmploymentBlawg…  Warns us that close to half of the current work force will not be able to maintain their standard of living when they retire.  Which is bad enough, until you read a little further down and discover that their calculations are including a "smaller percentage" from Social Security. I suppose zero qualifies as "smaller" but I don’t think they’ve allowed for that, even though they’re talking about people now in their 30s.  I commented on Social Security at length here: Cargo Cult Retirement

 I may have stated elsewhere that I find it very intimidating to contemplate just how diffcult it really is to accumulate adequate retirement savings.  The math involved gets pretty complex, and the time spans involved make estimation tricky at best, but here’s what my calculations say:

IF we assume the following simplifying assumptions (which I’ve tried to bias in a favorable way):

1. An 18 year old begins making 100K/year immediately and continues to do so until retirement at 65.

2. He or She expects to live to be 90.

3. On the average over his or her lifetime retirement savings earns 8% interest.

4. The goal is to leave no money unspent.

5. Taxes on interest have been ignored, the money saved is not counted as prior year income.

6. 73% of prior year gross is needed after retirement.  

Our 18 year old will need to immediately begin saving over $19000 per year and continue to do so throughout his employment. Since, generously speaking, only about two/thirds of the gross is take home pay, he needs to contribute about one third of his take home pay to savings for retirement, starting day one and continuing every year until 65.

He’d better hope he gets better than 8% and finds some tax advantages (IRA, 401K).  I think for many people their house serves as a forced savings plan which can be figured in, reducing the percentage somewhat.

By all means, tell me I’m wrong.  I want to be wrong…  



-- John
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