Retirement used to be a rite of passage. You worked for X-number of years, you either got a gold watch or you didn’t as a reward for your service, and you were invariably able to at least scrape by with an income stream or two that would see you comfortably through your “sunset years.”

The affordability of retirement in today’s world is far less automatic—or optimistic. Most people over the age of 65 are simply not financial capable of retiring. This is one of the major reasons that a large number of retirement age people are less likely to be retiring any time soon.

According to David L. Wray, president of Profit Sharing 401 / (k) Council of America and author of Take Control with Your 401(k), if you are considering retirement you should have 10 times your projected final salary saved in order to finance your needs for the rest of your life. In other words, in order to determine whether or not you will be able to retire when the time comes, you are advised to calculate your projected salary at the time of retirement, multiple that by 10, and make that figure your savings goal. Wray estimates that about seven times your projected salary would pay for a lifetime annuity, and with the addition of Social Security, the annuity would yield at least 100% of your final pay after retirement. The remainder can be used for investment purposes plus emergencies.

As companies are abandoning lifetime pensions in favor of 401 (k)s, more workers are facing the reality of how much their retirement will cost. The reason is simple. Americans are living longer, and many of them will outlive their retirement savings. Baby boomers will be spending a lot more time in retirement age than any generation in history. According to statistics provided by the Center for Disease Control, a 65-year old can now expect to live another 18 years, on average. The Social Security system set the benchmark retirement age at 65 back in the 1930s, when life expectancy was considerably lower than it is now. In fact, American seniors are living 50% longer than they were 70 years ago. Women still have the jump on men in this category, outliving them on the average of three years. In spite of that figure, according to the U.S. Census Bureau, men are still out-earning women by 24%, making retirement for women even more challenging than for men.

Health Care

The reality of increased life expectancy presents a staggering price tag in terms of health care costs. According to a March 2006 study by Fidelity Investments, “a retired couple with employer-sponsored health insurance can expect to pay $200,000 for out-of-pocket health care costs like premiums and co-pays. And this figure does not even include the additional costs of long-term care, which are not fully covered by Medicare.

Inflation

Inflation is that added financial burden that we can always count on to raise all our expenses exponentially to the upside, particularly these days when higher energy costs are boosting the price of everything, from food to transportation. And there is no way to predict how high it will go. Assuming the current rate of 4% inflation, the cost of living will double in just 19 years, which means than Americans retiring today will see their purchasing power slashed by half during the course of their lifetime. And 4% is on the low end of the spectrum. Back in the ‘70s, inflation hit quadruple that figure.

Conclusion

Adjusting to the realities of uncertainty, that “10 times” equation we talked about earlier should be raised to 15. Therefore, at 15 times one’s projected salary at retirement, in the case of someone making $50,000 a year, that individual would need a minimum savings of $750,000. And even at that, we’re cutting it close. 

Other unknown factors can also come into play, not the least of which is the shaky foundation of our health care and Social Security systems projected a decade or more into the future when retirement age demographics will be breaking new ground and costing the government money they will not likely be able to afford.

All this leads us to believe that those who have wisely saved for their retirement, assuming that retirement is their ultimate goal, will probably be able to enjoy all the benefits for which they have saved and invested over the years. For the rest of the population, it promises to be a challenge at the very least, and an exciting ride, at the most.