Tiny nest egg? You can still retire

Why? Because we've made heavy-duty commitments throughout our adult lives -- all four decades preceding retirement. Take those completed commitments -- children, a mortgage, etc. -- into account, and the income you need to replace in retirement is far lower than the 70% or more touted by the financial-services industry.

If you are single or if you rent, have no children and never borrowed for education, the conventional replacement goals are relevant. But if you ever married, had children and worked on paying off a 30-year home mortgage, you've never had 70% to 85% of your income to spend on yourself and your spouse. Consequently, the income you need to replace may be 15, 20 or even 30 percentage points lower.

Result? The probability of outliving your assets is much lower.

Lower the risk of running out

We can get an idea of just how much lower by going back to the Ernst & Young report. Faced with findings of such high rates of retirees going broke, the accounting firm made a second estimate. How much would the pre-retirement standard of living have to be reduced for people to have only a 5% chance of running out of money?

• Video: Rethinking retirement

Answers: about one-third for married couples without pensions; less than 14% for married couples with pensions. A one-third reduction in consumption takes a 70% pre-retirement standard down 23 percentage points.

That's right in the ballpark with all the income most adults have never had to spend on themselves.

Questions about personal finance and investments may be e-mailed to scott@scottburns.com. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found here and here.

Published Sept. 17, 2008

< previous |  1 | 2 |