Many May Feel Retirement Jitters

March 17, 2003
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GRAND RAPIDS — Those poorly performing equity markets that took money from immensely important retirement funds have people nearing retirement day worried. They’re anxious about whether they’ll have enough money to live on once they are shown the company door or decide to freely walk through it.

Financial gurus, unfortunately, don’t have a simple, one-size-fits-all answer that can calm the fears of those who don’t have three decades of investing ahead of them.

But there is one factor that almost all the experts seem to agree on: Those who are within ten years of retirement and feel they need to pump up their fund’s balance will have to do the bulk of the heavy lifting on their own.

Let’s say our retiree’s name is Sam. He just turned 55 years old and plans to retire at 65. Sam figured years ago that he will need $3,000 a month from his 401(k) to live on once he straps on his engraved gold watch in 2013 and had been pacing his investments to meet that goal. But as of Jan. 1, his retirement fund balance stood at $100,000. Two years earlier, however, that balance was $165,000.

So after twenty years of saving for his once greatly anticipated retirement, 40 percent of Sam’s funds went down a Wall Street drain in just 24 months. Now Sam is flustered. He isn’t sure he can get that cash back by retirement time, and he is clueless as to what to do.

According to local investment advisor Eric Ericksen, Sam can recoup his losses before he breaks in his new recliner and fires up his new high-definition 54-inch Sony — the pair of retirement gifts that Sam promised himself after putting three kids through college.

But to do that Sam is going to have to be realistic, totally committed, and, most of all, patient, because the clock is running and he can’t call a timeout. Sam is also going to have to brush up on his arithmetic.

“Number one, Sam has to understand that there is new math. And that new math is that he should plan — not guess, not bet — but make his retirement plan based on a 6 percent return,” said Ericksen.

Six percent. Not 8 percent, not 10 percent or 12 percent because those equity pay days are likely to be far and few between, at least for the short amount of time Sam has until he retires.

“Under the old math, Sam would have only needed $330,000 to retire on at 10 percent. The difference between the old and new math is vast and that is $465,000,” said Ericksen, who also teaches finance at Grand Valley State University.

For Sam to have $3,000 to spend each month of his retirement, his fund balance of $100,000 has to grow into $465,000 by the time he punches out on his career. That $465,000 would give Sam 155 months, or nearly thirteen years, of leisure-lounging, channel-changing, blissful retirement.

But at a compounded 6 percent return, Sam’s 401(k) plan would only give him $182,000 ten years from now — leaving him $283,000 short of his goal.

“In order to reach that figure, Sam needs to save $1,700 a month,” said Ericksen.

That means Sam has to salt away $20,400 a year for the next decade to reach his retirement goal. And Sam can’t look to Uncle Sam — no relation, by the way — for help, either, because the Feds won’t let him, or anyone else, tuck that much away in a 401(k) every year.

So Sam can max out his retirement plan with his annual allotment of $12,000.  But he will have to stuff another $8,400 each year into an IRA, a money market account, stocks, bonds, T-bills, a certificate of deposit, a mattress, or a combination of any, or all.

The best route for Sam to reach his retirement goal is to invest in a broad equity fund, one that gives him a chunk of the Standard & Poors 500. Over the years, these types of funds have consistently outperformed most other investments, including mattresses.

“If the winds of fortune are at his back, then every surprise is a positive one. Because if Sam earns 8 percent instead of 6, he is out a year earlier. If he earns 10 percent instead of 6, he is out two years earlier,” said Ericksen.

That is, of course, if he can save $20,400 a year for so many years.

“The point is, that Sam has to do most of the heavy lifting. That is the sad part. Before, he could save 5 percent and then the market would bail him out. Now, it’s the other way around. Sam has to do two-thirds of the work and the investments will give him the balance,” said Ericksen, who felt pretty sure about his prognosis.

“If I’m wrong about this, then Sam has too much money. And for him, and everyone else, that would be a nice surprise.”

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