Recently, the Wall Street Journal released their most recent iteration of their retirement readiness quiz, something they’ve done sporadically over the last decade. Anyone who has read this blog in the past knows we’re passionate about personal financial education. In fact, just last week we hosted our latest Education Series for Pre-retirees. We look forward to continuing to offer these sessions to young adults, career builders, pre-retirees and retirees into 2014.
Coming off that experience, I couldn’t help but play teacher and get out my red pen as I read through the quiz. Let’s look at some of the grades I dished out starting with some of the misses. You can check out the quiz in Glenn Ruffenach’s October 25th column here.
Questions 1 – 4: On Your Mark
I don’t like to start out negative, but the first question is the weakest of the quiz and, combined with the second, provides contradicting recommendations that could easily confuse. It’s the only glaring “F” I found.
The first question, referencing research done by Fidelity Investments, asks readers what multiple of their salary they should save to meet basic retirement needs at age 67. The response is 8 times salary. In the writer’s defense he follows up by quoting an Aon Hewitt study that suggests 11 times salary is needed at age 65.
The second question cites another study performed by Aon Hewitt and Georgia State University exploring what percentage of pre-retirement income retirees will need in retirement. The answer given is 85%.
Show Your Work: First of all, it should be said that I view all rules of thumb with a healthy skepticism. A core value of our firm is that financial advice is best given on a tailored, individualized basis. We’ll start scaling advice just as soon as the same two clients walk through our door. On average, I’m ok with the 85% post-retirement spending figure, but that makes Question #1 all the more troubling.
Suppose your last year’s salary is $100,000. The first question, depending on which figure you use, suggests you need to have either $800,000 or $1,100,000 saved to meet needs in retirement. Using Question #2’s result of 85%, that $85,000 annual need equates to a portfolio withdrawal rate of 7.7% – 10.6%. Yes, you can bring that down some if you account for Social Security, but it’s still far higher than the traditional 4% rule and there’s no shortage of experts who believe even that mark is too high.
Let’s assume that $20,000 of that $85,000 comes from Social Security. Just using the 4% would require of $1.625 million or 16.25 times your $100,000 annual salary.
Bottom Line: This core issue for those facing retirement is too important to leave to rules of thumb, especially those that are flat out unsustainable.
The rest of the quiz largely points to a lot of demographical data, surveys on saving, health care, and pre-retiree perceptions of what it will take to call it a career. The majority of it is a welcome, eye-opening education. Below are my highlights and comments on the questions in the remaining sections that caught my eye.
Questions 5 – 7: Retiring…and Working
A Gallup poll from earlier this year shows the average retiree stopped working at age 61, but that the average worker expects to retire at age 66. It’s an important gap, both because it’s difficult to pre-plan how we’ll feel about work years in the future and a reminder that we don’t always get to choose when retirement arrives. Layoffs, health issues and other unexpected events can come along and rob us of our best laid plans.
Bottom Line: Goals are good, but having a plan that allows you to be flexible in the face of the unexpected is better.
Questions 8 – 11: Life Expectancy & Health
This may be the most important sections of the quiz. We all inherently know that life expectancy is getting longer and the costs of maintaining our health continue to climb. But, when faced with making sacrifices today for the sake of our future selves, we’re reluctant at best to take action. As the quiz explains, we’re likely to live more than ¼ of our life in retirement. Health care costs during that timeframe could run more than $220,000 and that doesn’t include medication, dentistry or long term care.
Bottom Line: Enjoy today, but plan on being around a while and put a few dollars aside, especially for health care. The future you will be grateful.
Questions 12 – 15: Savings & Investments
It’s no secret that we’re not saving enough for retirement as a society. Only 5% of those eligible to save in a 401(k) or similar vehicle contribute the maximum amount. Another study cites only 15% of those 50 or older take advantage of catch-up provisions. On the flipside, more than 40% of those age 65-74 carry mortgages on their home and nearly a third carry credit card debt. Yet, less than ¼ of those working today have sought financial advice from a professional.
Bottom Line: Be on the right side of these statistics. Every little bit counts as we get closer to retirement. Paying down debt and building up retirement savings both have profound effects on allowing us the option of choosing when and how we retire.
Questions 16 – 20: Social Security
This section wisely points out the importance of picking when and how to collect benefits, decisions that can play a crucial role in long term financial success. The one issue I have with this section comes in Question 18, which answers the True or False question, “The Social Security Program is going broke.” as False. This does a disservice to the issue. The program may not be broke, but it is broken. Making adjustments now to prolong Social Security’s future is much, much easier than in five or ten years.
Bottom Line: Understand all of your options as they relate to drawing Social Security benefits. If you’re under the age of 55, consider accounting for the potential that all of your promised benefit may materialize. Encourage your representatives in Washington to do something about it today before it’s too late.
This is the longest blog I’ve written in quite some time, but while the quiz does a great job of bringing a lot of important issues to light, some red ink in the margins was required to make some clarifying points.
For those with some of these questions and concerns in mind, this article and those like it can be good places to start, but don’t accept them on their face without careful analysis or speaking with a trusted advisor.
Have a great week!