Jeff Pabst, CRC
I recently read an article from the Washington Post which stated, “If you don’t want to run out of money in retirement, follow this rule of thumb.” So, of course I clicked into the article to see what kind of advice they had to give.
This article particularly was referring to the 4% rule. I didn’t know what the 4% rule was, so I did some research. The rule says you will not run out of money in retirement if you only withdraw 4% from your retirement savings every year. So, if you have $300,000 saved in your retirement account, you will only be able to draw $12,000 annually. The rule itself seems sound, but, it may be somewhat unrealistic for the majority of Americans.
If your goal is to replace 80% of your $50,000 annual salary, you will need have $40,000 in annual income during retirement.
For the first example, let’s assume you don’t have any pension income and receive 20% of your income from Social Security ($10,000 annually). So, you will need to replace $30,000 in annual income through your retirement savings in this scenario.
To show the amount needed in savings to achieve the income needed for the 4% rule, we need to divide income needed by 4% (30,000 / 4%). The amount needed in this scenario is $750,000.
There’s are some problems with assuming someone will be able to save those kinds of assets. Most Americans are unable to save enough and may not even have a way to save through their employer. According to census research data compiled in this Bloomberg article, 79% of Americans work at a place that sponsors a 401(k) type retirement plan. That’s great news on the surface; however, the data also shows only 14% of employers offer a 401(k). So, what does this mean? I believe it indicates that smaller employers do not have the ability to provide a 401(k) plan.
Only 14% of employers offer a 401k.
An employer offering a plan is only half of the battle. The other half of the battle is getting individuals to participate and save in the plan. The truth is, people are not saving. According to a 2013 study by the National Institute on Retirement Security, the average investment account balance for Americans between age 55 and 64 with a retirement plan provided by their employer was $100,000. Also, the average investment account balance for the same age group without a retirement plan from their employer was only $12,000. So, the 4% rule is starting to look somewhat unrealistic for those who only have a retirement savings account.
The average investment account balance for [Americans age 55 to 64] without a retirement plan from their employer was only $12,000.
This is why all Americans should have access to secure monthly income through a defined benefit plan. Defined benefit plans provide modest monthly benefits that will continue until the member passes away. The benefits are consistent, measurable and predictable. A person participating in LAGERS can quickly and easliy calculate what to expect through a monthly benefit. Below is an example of the impact a defined benefit plan can have on your ability to achieve financial security in retirement.
If someone worked for a LAGERS employer for 20 years under the L-7 (1.50%) program, they will receive 30% of their average salary for life.
Using an estimated Average Salary, the benefit would be $14,411 per year. In this example, you will still be receiving an estimated $10,000 per year from Social Security plus $14,411 from LAGERS.
So, they will need to have $15,589 in annual income provided by their investment account to replace 80% of their pre-retirement income.
If we use the same mathematics from above and divide the annual income needed by 4%, instead of needing $750,000, you would need $389,725 in your retirement account at retirement. Still a large number, but not insurmountable.
With a pension plan, financial security becomes attainable for all Americans. Saving money is still necessary to achieve financial security, even with a pension. But, with a pension plan and stable savings, employees have the ability to leave the workforce with dignity and security. Which, of course, is what we all deserve.
