Don't Despair Over Small Retirement Savings

By Philip Brewer on 23 September 2009 22 comments
Photo: Philip Brewer

If you quit checking your 401(k) balance last year, because the market crash made it too depressing, now might be a good time to take a fresh look. It'll still be well down from the peak, but it's probably recovered quite a bit from the low. However small it may be compared to some imagined goal, don't underestimate the value of any amount of retirement savings.

My brother just told me about a colleague—a college professor approaching retirement age—who suffered so badly in the crash that his entire retirement savings were not much more than one year's pay. "Obviously," my brother observed, "He's not going to be retiring on that anytime soon."

The fact is, though, there's a big difference between "small" and "insignificant" when it comes to money. If you're earning, let's say, $80,000 a year (which a full professor approaching retirement might well be) and your savings are only $80,000, it's easy to imagine that your retirement savings are insignificant. It's not true, though.

A capital sum of $80,000 will support spending of $260 to $330 a month for the rest of your life (and probably forever—see my post How much can I spend in retirement for a description of the 5% and 4% rules).

Now, somebody who's been living on $80,000 a year is not going to support themselves on $300 a month—but that doesn't mean that $300 a month is insignificant. It might pay your property taxes, or your home maintenance expenses, or your utility bill. (If you have a small, well-insulated house in a low-tax community, it might pay all three.)

If you have nothing else to retire on, this is probably too little—but hopefully your retirement is not dependent on just your retirement savings, but instead gets a boost from other savings, physical capital (such as a house), pensions from previous employers, social security, intangible capital (such as a copyright on a book), and so on. Most especially, of course, your retirement is based on your ability to save more money at your regular job before you retire, and then your ability to continue to earn some money after retirement.

Finally, I'd like to point out that your expenses in retirement have only the most tenuous relationship to your pre-retirement income. Yes, those "can you retire" calculators all ask about your income and then assume that you need to replace a large fraction of it—but that's just stupid. In retirement you need to fund your expenses, not your income.

Someone approaching retirement ought to be about at the peak of their earnings—which to my mind ought to mean that their expenses are rather less than their income. It's one thing for a 20-something just out of college with a low income and a high student loan burden to be spending every cent of his or her take-home pay. For a 60-something college professor, expenses ought to be quite a bit less.

The difference, of course, is the money that's available for investment. But that's the less important part of the equation. More important is that a low cost of living means that you can retire without having to replace your entire income. And if that's true, even a modest amount of savings can support your retirement.

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Guest's picture

This is how I like to keep track of my own savings progress - rather than look at the round sum number (which is still small), I add up the cashflow I'm getting in terms of what bills it can pay, and so, build up my "retirement" lifestyle piece by piece that way. It keeps it tangible - "cable/phone/internet taken care of, next!"

Guest's picture

I read a great article on starting a retirement fund for your children at a very young age, and with they way that it appreciates, it can total nearly $1 million by the time they are at retirement age. I think saving young is the key to a good retirement. And not drawing from that fund until retirement.

Guest's picture

Don't bother trying set up accounts for your kids. Just put more in your own accounts. They can have the surplus when you die. And with a Roth IRA, they get it tax free!

Guest's picture

Yep -I've been 20 years in retirement.
Twenty years of never touching the principal.
The first ten years I had my monthly retirement checks.
And as the medical bills got bigger I had my Social Security checks and Medicare to pay those off. The only time I have touched the base number is when my kids need money.
I lost over $400,000 last years on my Vangaurd IRA base.
I can't wait to see this years numbers.
Carl from Illinois

Guest's picture

Philip--This is an oustanding post! The financial/investment industry has people needing millions to retire, but statistically, the vast majority of retirees will never come close to that! Does that mean their out of luck? Hardly!

The majority of people retired right now don't have seven figure retirement accounts, and I'd guess the majority don't have six figures either (statistically, this is true). But somehow they manage to survive.

So they lower their living costs and supplement their retirement incomes with employment income. Not the optimal situation of course, but who said life is ever perfect?

This post is encouraging to the many who don't have the fat retirement accounts. There's always hope!

Guest's picture

This is really good food for thought. But personally, I don't ever want to stop doing something that brings in the money... Because I want to end up having income from my passions. :) I know I'm a bit of an idealist, but it can't hurt just a bit, can it?

Guest's picture
Debbie M

One of my friends likes to calculate where he can afford to retire. At first, he could only afford very poverty-stricken third-world countries.

Or you could think of the lifestyle you could afford. The person with $80,000 savings might be able to afford to retire as a homeless person who can get their food from a grocery store rather than dumpsters, get their clothes from thrift shops instead of dumpsters, buy all the ibuprofin and band-aids they need, and take an occasional bus ride. Or maybe live out of an old car and practice a little freganism.

Another point is that many people have a lot of expenses connected with employment (such as fancy clothes and dry cleaning expenses, office parties, and commuting expenses) that will disappear when they retire.

Guest's picture

Still, the older you are, the more you lost. People who have been investing for only a few years may have already made a big portion back, especially if they kept investing. Those--like me--who have been investing for about 20 years lost more. In an absolute sense. But also because investments in the last 6 months of an up-market are only a tiny portion of the total amount invested. For newish investors, the proportions are closer to equal. I hope this makes sense....

Guest's picture

Following are the basic steps to make your future retirement planning;

* Evaluate your financial status
* Fix your financial goals
* Develop a retirement plan for you
* Implement and track the plan

Evaluate your retirement status:
Prepare a basic financial check list of your income, expense, assets and liabilities. This will help you to understand your financial status. Understanding your overall income and spending habits will help you in fixing your financial goals.

Fix your retirement goals:
Once you evaluate your retirement goals, make a list of your future financial goals of life. It may include buying a home, purchase of a car, children’s higher education, daughter’s marriage expenses etc. You won't be able to imagine these cash outflows unless you write them down. Fixing of financial goals will help you in developing the suitable financial plan/strategy.

Develop a retirement plan for you
Retirement plan depends on your retirement goals. Preparing a retirement plan is a one-time activity. You should know how you can meet your goals and objectives keeping in mind your present and future resources. Experts can help you in developing a financial plan.

Implement and track the plan
Once you design a retirement plan it becomes very important to implement the plan and track the same. Having a good plan and not taking any steps to implement will not help you in any respect. This is the most important step as you need to act on the plan if you want to get it going. Mere implementation is not enough to achieve the retirement goal, proper tracking also should be there.

A good retirement planning will help you finding easy and practical solutions for the following;

* Managing debt
* Reducing expenses
* Coping with unemployment
* Minimizing complications if your retirement institution fails
* Protecting your retirement savings
* Making informed decisions about your home and mortgage
* Improving your credit standing
* Preparing for financial emergencies

In our next articles we will discuss different retirement plans to be adopted in various financial conditions such as:

* Job/money rate crisis
* Inflation
* Unemployment, etc.

Guest's picture

My in-laws are talking retirement and nearing it, but they are far from prepared for it. I don't think they realize that they need to sacrifice more now and change some of their bad habits to be able to provide for themselves in retirement. Instead, their "plans" change frequently but have one thing in common: dependance on someone or something else to fix the jam they've gotten themselves into.

I don't know what I can do to help them see the bigger picture and be more realistic, but I appreciate the advice given in this article and the comments.

Guest's picture

Instead of setting up retirement funds for you children, I think a better method is to simply teach them about money and how to invest, save and budget. I sure wish my parents did this for me, it was not until I was in my 30s and had to file bankruptcy that I decided to learn about investing and saving. I opened up investment accounts last year for my neice (11) and nephews (5 & 14) and let them decide what they want to invest in. I started them out with a small bank roll that cant be touched and I put a little in there each month. We then go through what types of companies they want to invest in and they tell me why, surprisingly in that time frame their returns have been better than mine. The youngest (5yrs old) has made some very good choices and he told me he wants to put all his birthday money in the account (not sure I will let him do all his Bday money but he is starting to think in the right direction when it comes to money). I am so glad I started this, it has helped me get to know them better and brought us together (I live 6 hrs away from them). They call me nearly weekly so we can reveiw thier accounts and discuss any changes (buys/sells) they wish to make...and I also get to find out all other kinds of things that are going in their lives.

Guest's picture

I'm a guy earns $80,000 and is spending most if not all of it because he has no retirement savings and he'll be okay? He might make due but will he make due because he has to or because he wants to. Luckily, I have some time before I retire but my goal is to live the way I want to. I don't want my money to dictate how I live. I guess I feel like today I see more and more people's lives that are dictated by their savings or lack thereof. If I enjoy my life at $80,000 I'm not going to all of a sudden choose to live off of $4,000 a year. I might be able to make due with less maybe even half but the key there is 'make due'. My goals in life aren't to 'make due' or to just get by. But that's just me.

Philip Brewer's picture

First, I'd like to speak up in favor of "making do" and "getting by."  That is, I don't think you necessarily need to put the word "just" in front of either of those.

Second, there are a lot of reasons why someone might have a high income and almost no savings.  Of course it could be too much spending on frivilous stuff, but it could just as easily be high levels of spending on serious stuff.  For example, sending a series of children to expensive colleges might well keep someone from doing any significant retirement saving until later than the personal finance books would recommend.

Finally, and kind of the point of my article, it's possible to fine-tune all the necessary variables.  Cutting spending simultaniously cuts your cost of living not only now but on into the future.  Continuing to work after normal retirement age is an option for most people.  Continuing to earn some amount of money after "retirement" is also an option for most people.  And there other little possibilities--earning extra money, for example.

So, as I say, don't despair, just because your retirement savings aren't as high as the book say they ought to be.

Guest's picture

We have about half a year's salary in retirement savings (took a big hit with the market downturn losing about 40%), and I always feel like it's not "enough" for a couple of our age (33 and 32), but this helped put my mind at ease.

We have young kids, and I'm staying at home with them for now, so it limits our earning power.

In about 5-6 years I anticipate working full-time from home, and that my husband's salary will increase, so we'll just bank those increases.

Meanwhile we're paying off debt, and will have a paid for home by the time we reach retirement age even if we simply follow our 30 year mortgage's schedule.

Our kids will be grown, we'll be able to downsize to a smaller/less expensive area and home by then as well.

We'd also love to continue working on things we enjoy past typical retirement age.

I think we can retire on a lot less than most calculators suggest.

Guest's picture

This was a great post. I get too often get caught in a futility mentality -- "This isn't enough money to matter, so why bother." Clear thinking is the solution, as always.

Guest's picture

Laid off this past spring, I was on severance until September and this coming February I will be starting social security ... early; at 62. This certainly wasn't our plan (I was going to work until 66). But staying flexible we've sort of landed on our feet ... since my spouse is only 48 and we were able to switch to health insurance through her employer, we have moved back closer to family, bought a smaller home and are pretty much the living example of what you wrote. I had several years of my previous salary already in my 401k at the time of my layoff ... it did go down in value and we got scared but it's now coming back up (slowly) and we have reason to be optimistic that, by tightening our belts, learning new skills, being flexible and taking life with heavy doses of joy & love we'll be OK. Initially that glass looked only half empty, now we've poured what we have into a smaller glass and it's nearly full ... and we're much happier for it. Thank you for a wonderful blog.

Guest's picture

How many of you pulled just about completely out of the market?

I hear that last year 2009 and the year prior, 2008, 26% of those in the market sold everything they had.

I was just trying to find out what a truer number is.

Thank you - so much!

Guest's picture

While the market conditions are scary for everyone, there are some guidelines that individuals can follow to help stretch out whatever retirement money they have allotted to help it outlive them. Check out Daniel Solin's article:

Guest's picture

The thing that scares me is the uncertainty of care needed in retirement. Sure, I could fund a retirement on much less than I'm earning now -- if I were healthy. I could live in a cheap studio, eat at home, etc. But what if my health failed? What if I needed help with meals or self-care? In my city, assisted living costs around $35,000/ year and a nursing home costs $70,000+/year. Home care costs are similar or more, depending on how much care you need. And can we all count on our children to care for us?

Long-term care insurance will cover some but not all of those costs. Those costs are huge and scary, and there's not much you can do to reduce them if you need the care. The alternative -- spending your final years in a Medicaid nursing home -- is not an attractive prospect.

That's why I'm saving as much as I can, and why I'm loathe to dip into those funds for my kids' college (although each kid has a 529). You just can't be sure what your health situation will be in retirement.

Guest's picture

Why is it that when you see articles like this one that it only speaks of people who have a high income and a 401k savings, etc., and do not take into consideration the people working for much, much lower wages and don't have the ability to have this or any other type of savings. Could it be because those who make less than 25,000 to 80,000 are unimportant or could it be that the country doesn't really care about these people. They would like to retire just like everyone else, but they are the ones you see, old, grey and crippled still having to work the rest of their lives. Where is their help or suggestions on what to do?

Guest's picture

I love the way his words of comfort about "pensions" and "book copyrights" to supplement the $300 per month. Seriously, I don't know anybody under 60 who has a pension waiting for them, and I would imagine the crowd of published authors would be equally thin. If $300 is all you've got, you may have to retire in Central America.

Philip Brewer's picture

My whole point was that "$300 is all you've got" applies to almost nobody. Most US people will qualify for Social Security. Most people will be healthy enough to go on working past regular retirement age if they need to. Most people who can't (or don't want to) continue regular employment will be able to earn at least something if they need to. And so on. Pensions and copyrights are two out of many, many possibilities.