Are You Saving Enough? It’s a Personal Question.

Are Americans saving enough for retirement?

Many financial service companies, citing a paltry U.S. savings rate, say we’re not. But the savings rate takes into account only how much people are saving from their current earnings.

A recent A.G. Edwards & Sons Inc. “nest egg� survey, which looked at the savings rate as well as how much people have accumulated in savings, says we are.

Another recent study, by the Employee Benefit Research Institute, provides a nuanced answer. Seven in 10 Americans are saving, but only 4 in 10 have even attempted to figure out how much they’ll need.

The institute’s study -- one of the most widely watched in the industry -- has a vast amount of information about how much different groups of consumers have saved. Insiders acknowledge that all that data can be used to support either side of the argument about the sufficiency of Americans’ savings.

That’s because how much people have saved is only a fraction of the information necessary to assess retirement readiness.

“I tell my wife that we can retire tomorrow. We just have to live on $52 a month,� quipped Mark Wilson, a certified financial planner with Tarbox Group in Newport Beach. “It’s not about how much you’ve saved, it’s about how much you’re going to spend. There are people who have $2 million saved and they’re going to run out of money and there are people who have $150,000 saved, and they’ll have more than enough.

“How much you are going to spend is the most important factor of all.�

Indeed, said Wilson, the important question is not whether Americans, as a whole, are ready for retirement. It’s whether you, as an individual, are.

The worksheet below can help you figure that out.

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Retirement arithmetic

Step 1: Estimate your monthly retirement income needs

To do that, take your current monthly budget and subtract spending that won’t continue in retirement--such as the amount of money you’re now saving for retirement. If your mortgage will be paid off, take that out too.

Now add in expenses that you expect or desire. For instance, if all or most of your medical bills are covered by insurance now, you might want to add in a monthly amount for future uninsured medical costs. Plan to take an extra vacation or two each year in retirement? Figure the rough annual cost (in today’s dollars) and divide by 12 to get the monthly estimate.

The result of all that adding and subtracting is the monthly income needed, in today’s dollars. Jot that number down:

$__________

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Step 2: Subtract expected monthly contributions from Social Security.

Each year the Social Security Administration provides estimates of your monthly benefits, in today’s dollars, but adjusts actual benefit payments for inflation. That allows you to subtract the Social Security estimate from your monthly income needed before adjusting for inflation. Result:

$___________

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Step 3: Adjust for inflation

To do that, multiply the result from step 2 by the appropriate figure from the chart below. In other words, someone who would be retiring in 20 years would multiply their monthly requirement by 1.806 to figure their inflation-adjusted needed income:

Inflation adjustment

*--* Years to retirement Multiplier* 5 years 1.159 10 years 1.344 15 years 1.558 20 years 1.806 25 years 2.094 30 years 2.427 35 years 2.814 40 years 3.262

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*Based on a 3% average annual inflation rate.

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Step 4: Subtract defined-benefit pensions

These are the type that pay monthly benefits for life. Because they are not adjusted for inflation, your expected monthly pension payment is subtracted after inflation adjustments. The result is the amount of monthly income you need to generate from your savings:

$_______

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Step 5: Determine the future value of your savings

To figure out how much your current savings would be worth in retirement, you need to estimate how much you’re going to earn on your nest egg between now and then. According to Ibbotson Associates, a Chicago-based market research firm, diversified investment portfolios earn an average of 7% to 9% a year. If you invest aggressively--that’s considerably more stocks than bonds--you can expect to earn closer to 9%; more conservative investors should anticipate earning 7% or 8%. If you’re close to retirement, though, figure an even lower rate--5% or 6%--because you won’t want to take as much risk as those who have more time.

Use the multiplier below that best corresponds with your return expectations and the number of years you have until retirement to figure out what your current savings will be worth in the future. Result:

$_______

Future value of current savings

Take the amount of money you have saved already and multiply by the appropriate figure in the chart below. In other words, if you have $100,000 and expect to earn an average of 7% on that money before you retire in 20 years, you’d multiply $100,000 by 4.04 to find that your savings will be worth about $404,000 at retirement.

*--* Years to Rate of Return retirement 5% 7 5 1.28 1.42 1.57 10 1.65 2.01 2.45 15 2.11 2.85. 3.84 20 2.71 4.04 6.01 25 3.48 5.72 9.41 30 4.47 8.12 14.73 35 5.73 11.51 23.06 40 7.35 16.31 36.11

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Step 6: Determine whether that’s enough savings

Multiply the result from step 5 by 5%, figuring that you could probably generate that much income from your nest egg without tapping principal. Divide by 12 to determine the monthly income your nest egg would generate. And compare the result to the amount you figured you’d need to generate from savings (the result in step 4).

$_______divided by 12=$_______

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Step 7: Calculate how much more savings you will need

If your current savings will produce as much, or more, income than you think you’ll need, you’re in good shape. All you need to do is revisit this calculation every five years or so--or whenever the circumstances of your life change dramatically.

If your savings won’t be sufficient, you need to figure out how much more you’ll need to save each month, from now until retirement, to generate the appropriate nest egg. To do that, multiply the amount of your monthly shortfall by 240. The result is the amount of additional savings you’ll need, assuming that your savings will throw off 5% in spendable income each year.

$_______

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Step 8: The bottom line

Take the number from step 7 and multiply it by the appropriate figure in the chart below. That tells you just how much you need to save each month to generate the necessary nest egg. If you’re saving less, you need to boost your savings or figure that you’ll retire later or live on less in the future.

Required monthly savings: $_______

*--* Time to goal 5% 7% 9% 5 years 0.0147 0.0140 0.0133 10 years 0.0064 0.0058 0.0052 15 years 0.0037 0.0032 0.0026 20 years 0.0024 0.0019 0.0015

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Source: Times research

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Kathy M. Kristof, author of “Investing 101â€� and “Taming the Tuition Tiger,â€� welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail [email protected]. For previous columns, visit latimes.com/kristof.