1/31/2014 Retiring on Your Own Terms - MoneyBeat - WSJ

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5:59 pmJan 31, 2014 THE INTELLIGENT INVESTOR

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Retiring on Your Own Terms

By JASON ZWEIG

— Credit: Christophe Vorlet

By creating a new savings plan this past week called the myRA, President Barack

Obama refocused attention on the retirement crisis.

While the myRA is a small step in the right direction,

particularly for lower-income Americans, tens of

millions of people remain trillions of dollars short of the

savings they will need to fund their retirement.

The solution is simple, but it isn’t easy. Americans

need to save more—not just a little more, but vastly more, according to a new study by

two leading investment analysts.

To be assured of having enough money to fund a comfortable retirement, you should

save a total of 22 times the annual income you want to earn when you retire. That is

higher than many previous estimates, but it offers near-certainty of hitting your target.

For instance, if you want $100,000 in annual income (not counting Social Security), then

your magic number is $2.2 million in total retirement savings. You can hit that magic

number if you are prudent and willing to save money like mad.

Think of yourself as the sponsor of a traditional “defined benefit” corporate pension plan

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that sets enough money aside to guarantee a steady monthly income to retired workers

for the rest of their lives. Then recognize that the only beneficiary of that pension plan is

you.

That is the framework proposed in a recent article in the Financial Analysts Journal

by Stephen Sexauer, chief investment officer for U.S. multiasset management at Allianz

ALV.XE -0.92% Global Investors in New York, and Laurence Siegel, who heads the CFA

Institute Research Foundation, a financial think tank in Charlottesville, Va. They call it

“the personal pension plan.”

How would you manage such a plan to ensure that it never came up short?

You would consistently fund it with ample savings, invest patiently in low-risk assets and

structure the payouts to provide steady income during a long retirement.

Some pension plans themselves have come up short, but only because they promised

too much in benefits or set aside too little in assets, say Messrs. Sexauer and Siegel.

Individual investors, Mr. Siegel says, don’t face the same pressures to fudge the

numbers.

Many people working today are likely to live to the age of 100 or 105, says Mr. Sexauer.

So if you work for 40 years, from your mid-20s to around the age of 65, you ought to

plan on accumulating enough savings to last for up to 40 years of retirement.

How do the researchers arrive at their magic number of 22? Let’s say you earn $150,000

a year and believe you can live well in retirement on two-thirds of that, or $100,000.

(Estimates of the percentage of your working income that you will need to live in

retirement vary widely from 50% to 100% or more , but many people find they can live

on less than they thought—even after accounting for health-care costs.)

The magic number answers this question: For each dollar of annual income you want in

retirement, how many dollars of assets will you need to save before you retire?

Ideally, you want to be certain — not just pretty sure—that your money won’t peter out

before you do.

The closest thing to a riskless asset is Treasury inflation-protected securities, U.S.

government bonds that promise to preserve your purchasing power. Conservatively

assuming a rate of return of zero, a $2 million portfolio of TIPS will enable you to withdraw

$100,000 a year for 20 years.

With the remaining $200,000 you have saved, Messrs. Sexauer and Siegel recommend

buying a deferred life annuity up front. That type of insurance generates a constant

payout before inflation that will cover your income needs if you live past age 85.

The two researchers base their estimate of the cost of this kind of annuity on price

quotes from several insurance companies (Allianz, Mr. Sexauer’s employer, isn’t among

them).

That is how saving $2.2 million before retirement will generate $100,000 in annual

income with near-certainty.

Many people count on earning high investment returns to reach their retirement goals. If

you invest in riskier assets, you might get a higher return, enabling you to save less.

But you also might get a lower return; that is what makes “risky” assets risky. In that case

you would have to save even more to make up the gap.

Only by saving safely enough to end up with 22 times your annual retirement income can

you guarantee that payout.

Both Mr. Sexauer and Mr. Siegel keep much of their retirement savings in TIPS to protect

against the risk of coming up short. (A comparable method, from investment manager

BlackRock, uses slightly different assumptions and comes up with somewhat lower

multiples of income that you must save.)

“What you’re doing here,” Mr. Siegel says, “is saving and investing the same amount that

a defined-benefit pension plan sponsor would to fully fund your pension.” If you do that,

“you’ll end up with the same answer”—a retirement you don’t have to worry about.

— Write to Jason Zweig at intelligentinvestor@wsj.com, and follow him on

Twitter:@jasonzweigwsj

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CLEAR POST

8:03 pm January 31, 2014

XRayD wrote:

VERY nice. Let small employers “bundle” up the first $15K and THEN give it wall street, so theycan start skimming their management fees!

Would it not be better if the government contracted with Vanguard or Fidelity (and impose aFIDUCIARY duty on them) and let all employees invest their contribution of $25 each pay period

Investment Banking Scorecard ›(http://graphicsweb.wsj.com/documents/INVESTMENT/InvestmentBankQuarterly_1007.html)

Global U.S. Europe

M&A Adviser Rankingin billions

Goldman Sachs

J.P. Morgan

Morgan Stanley

BofA Merrill Lynch

Barclays

$100 $200 $300 $400 $500 $600 $700

YTD 2012 YTD 2013

Source: Dealogic See More Data »(http://graphicsweb.wsj.com/documents/INVESTMENT/InvestmentBankQuarterly_1007.html)

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right away into the S&P500 SPY if they want, or perhaps 3-5 other ETFs – so they can averagetheir purchases over 15 years say, if they contribute $1000 a year?

But of course, as MyRA grows, Wall Street is drooling already!

What would happen if I transferred the $20,000 in MyRA to an IRA with a mutual fund, and themarket crashed or we had a prolonged bear market?

Looks like the govt. is creating a program to fatten up the pigs and leading them to the slaughterhouse, unless the “no loss” guarantee would apply to such an IRA transfer (which of course, isnot possible). Another thoughtless Obama program to make it appear as if he is (suddenly)worried about the poor! And where will the unemployed and the poor or those supplementingtheir income with food stamps get $25 a week to put into this latest scheme/scam to feed WallStreet?

7:47 pm January 31, 2014

Never Forget to be Debt Free wrote:

Go into retirement with your planned retirement home paid off. Better yet, pay off your retirementhome while living in your working/family raising home. When you sell the working home youpocket the proceeds. If you are retiring to a desirable location, waiting until retiring to buy it youmay find you have been priced you out.

I’ll be sitting in my paid off lake home and live four hours away so I can use it now on theweekends. Fishing is great, boating is great and there isn’t a confiscatory Obamacrat anywherenear me.

7:16 pm January 31, 2014

Al wrote:

That’s great if purchasing power is consistent over 40 years. If not, you’re SOL. Using a USGinflation calculator, 40 years ago $21k approx equals what $100k is now. Imagine today trying tolive on $20k a year as your standard of living declines by over 350% during that period. Goodtimes.

7:08 pm January 31, 2014

Justin wrote:

Regarding the $100,000 withdrawals, is there an inflation adjustment over the 20 years? Wouldyou have reduced purchasing power each year, or would you increase your withdrawal toaccount for inflation? Also, given the example of the annuity, is the plan to have a zero balanceat the end of the 20 years?

7:02 pm January 31, 2014

Josh Mc. wrote:

Who else is a better teacher and example of living within their means than Obama?

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