Q: I read your response to an aggressive saver who wanted to retire at age 52. I am even younger, 47, with $500,000 saved in tax-deferred accounts. My question: Have I saved enough that if I do not touch my savings, can I retire sometime between 59 and 62 even if I don’t save anymore? I expect to need $50,000 a year in today’s dollars and am not counting on Social Security.
A: You’re “not counting on Social Security’’? Every time I get into a conversation about retirement, someone always says, “Social Security won’t be there when I retire.”
Social Security will continue to be a critical financial foundation to retirement. People can and should count on it being there for them. Social Security will be available when the last wave of boomers reaches retirement. Millennials — the generation ranging in age from teens to twentysomethings — should feel confident Social Security is here to stay.
Various bipartisan budget balancing proposals issued in recent years agree with me. Here’s how Erskine Bowles, the former chief of staff for President Clinton, and Alan Simpson, the former Republican senator from Wyoming, describe the program: “Social Security is far more than just a retirement program — it is the keystone of the American social safety net, and it must be protected.”
The sweeping budget overhaul sponsored by former Republican Senate Budget Committee Chairman Pete Domenici and Alice Rivlin, the budget director under Clinton, say Social Security “does not need to be fundamentally altered; rather, it needs only modest adjustments so that it can continue to serve as a financial foundation for millions.’’
“Modest adjustments” is right. Even if nothing is done to shore up the system’s finances, the rhetoric that Social Security is hurtling toward bankruptcy is wrong. It will pay full benefits until 2033, according to the latest projections. There will still be enough revenue coming into the program after 2033 to pay 75 percent of benefits. That isn’t a desirable outcome, but it says the status of Social Security is far from doomsday. The system’s finances will be improved with a handful of tweaks. For example, raising the cap on wages subject to payroll taxes from its current $113,700 for 2013 to $250,000 would extend the date of exhausting reserves another four decades.
Don’t like that idea? The Congressional Budget Office has analyzed 30 options for bolstering the health of the system. Social Security is relatively easy to put on a sound footing after liberals and conservatives get down to business.
Now, to your question. The honest answer is that coming up with a reasoned answer to your question involves future savings rates, spending habits, income projections and so on. A quick gauge was devised by Brett Hammond, former chief investment strategist at TIAA-CREF. Hammond figures employees need 60 percent of pre-retirement income during retirement from 401(k) plans. Social Security fills in the remainder. How will you know if your nest egg will cover 60 percent of pre-retirement income? If you’re 35 and plan to retire at 65, you should have 2.1 times your salary to be on track. At 45, the multiple rises to 3.6 times. At 55, it’s 5.4 times. By the time you retire, you’ll want the number to be 7.7 times.
Check on how you’re doing with a savings metric such as Hammond’s and Fidelity’s, at least until you take a more in-depth look.
Chris Farrell is economics editor for “Marketplace Money.” His e-mail is email@example.com.