Retirement readiness? Even with a great 401k most will have to work hard to retire well. Blog Feature {% if subscribeProperty|lower == "yes" %} {% else %} {% endif %}
Greg Carpenter

By: Greg Carpenter on December 18th, 2013

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Retirement readiness? Even with a great 401k most will have to work hard to retire well.

Retirement Planning


I’d like to share an analysis piece I found on the web that simply (and profoundly) illustrates why many middle class Americans are not “retirement ready.” It’s from Fidelity 401k, and they do an excellent job of illustrating what one needs to do to be ready to retire. Key paragraph:

“Let’s call our hypothetical worker Lily. We assume she starts saving at age 25, retires at 67, and lives until 92. Lily’s salary grows from $40,000 at 25 to $73,640 at retirement (with no breaks in employment). She defers 6% of her salary at 25, escalating to 12% within six years. She receives a 3% company match and takes no loans or withdrawals. We assume her investments grow at 5.5% a year (3.2% after assumed inflation of 2.3%). When she retires at 67, we assume she will spend 85% of her ending salary after taxes (tax rates stay the same), and get $1,918 a month in Social Security income.”

So Lily will have a comfortable retirement, with the ability to continue her modest lifestyle.

Allow me to illustrate what has to break just right for Lily to achieve her modest retirement.

She needs to save for 42 years (!) with no breaks in employment. Lose your job, and you’re behind. Miss work for illness and you’re behind.

She contributes 12% of her gross pay for over three and a half decades, rain or shine and never takes a loan or a withdrawal. Unforeseen expense comes up and you’re behind. Kid can’t get a scholarship and you’re behind. Family member gets cancer and your insurance can’t cover – you’re behind.

Her employer makes a 3% company match every year for 42 years. Can you imagine any small business 401k plan achieving that consistency?

Even after all of this saving and her successful dodging of life’s trials and tribulations, Lily will still need Social Security to achieve her modest retirement. In fact, according to the footnote on the web page, Social Security income will provide a whopping 69% of Lily’s retirement income.

Let me summarize. Lily did everything right from day one of her working life for 42 years and had a strong employer and an excellent 401k plan. She avoided all of life’s financial icebergs for her entire adult life. Her retirement savings will provide only 31% of her required income in retirement.

This is not a failure of the 401k system – without the 401k she is significantly worse off.

The choices we make now will have a significant effect on how well we retire. Our plans will never work out exactly as we project. If we use a consistent, frugal, disciplined approach to retirement savings we will stand the best chance of achieving our investment objectives.

Next week – I’ll explore some of the innovative new online tools available for gauging your retirement readiness – most are free!


About Greg Carpenter

Greg Carpenter founded Employee Fiduciary in 2004. With 29 years of experience in accounting and finance, Greg has brought his expertise to a variety of advisory, senior and executive management roles. Greg has worked for a national accounting firm, a Fortune 500 plan sponsor, a major brokerage firm, and he served as the CEO of a major 401k TPA firm. He is a CPA and earned his BA from Yale and his MBA from The University of Chicago Booth School of Business.