Retirement Savings - How Much is Enough?

An interesting research paper produced in February 2007 by the investment firm Alliance Bernstein's Wealth Management Group is titled "Retirement: Plan Early and Often." Among the issues it deals with are how much is needed for a comfortable retirement and the importance of the individual's or family's spending rate. Consider the following table from Bernstein's paper which shows how much a married couple of the same age needs in investment assets (excludes residence and other personal use assets) at specified spending levels and specified retirement ages, assuming a 60% stock and 40% bond (both highly diversified) portfolio mix and based on a 90% confidence level that the portfolio will be sufficient to last until death.

How much do you need to retire?

Retirement Age

55

60

65

70

75

Spending Rate*

3.4%

3.6%

3.9%

4.3%

5.0%

Size of Core Portfolio You'll Need (in millions)

Annual Budget*

$100,000

$2.9

$2.8

$2.6

$2.3

$2.0

$150,000

4.4

4.2

3.8

3.5

3.0

$200,000

5.9

5.6

5.1

4.7

4.0

$300,000

8.8

8.3

7.7

7.0

6.0

$500,000

14.7

13.9

12.8

11.6

10.0

*Spending rates as a percentage of investment assets at the various ages; annual (after-tax) budgets are grown with inflation.

The table tells us, for example, that for someone retiring at age 65 and desiring $200,000 of after tax spending money, the indicated minimum level of investment assets to provide a 90% level of confidence that it will be sufficient through mortality is $5.1 million. The spending rate of the investment portfolio is 3.9%. If retirement is deferred until age 70, the $5.1 million needed declines to $4.7 million, and the spending draw-down increases to 4.3%. Note that this data only relates to the investment portfolio and does not reflect the extent to which additional spending can be funded by social security or other non-investment income.

    Bernstein properly points out that many variables impact this type of analysis. Among these are:
  • the mix of taxable and tax-deferred investment assets (the table above assumes 75% taxable and 25% tax-deferred; but if a mix contains more tax-deferred, a larger total is needed to cover income taxes as the tax-deferred account is drawn down).
  • the portfolio's concentration (a higher concentration/lesser diversification reduces the 90% level of confidence that the assets will be sufficient).
  • income tax brackets.
  • gender and marital status (in relation to life expectancies).
  • noninvestment assets which can be converted to investments (home downsizing, for example).

We get many questions about retirement planning, and we know that the answers are very much dependent on each individual set of circumstances. In future issues, we'll intend to share more of the results of Bernstein's research.

Doug Dean

ddean@ddfky.com