IRS tables tell you how much you need in retirement

BY John Waggoner
USA Today

Many people feel that the odds of getting Social Security benefits at retirement are about the same as finding the Hope Diamond in a Cracker Jack box. This is probably an overreaction, although it is likely that benefits may be reduced, the retirement age raised, or both. If you're planning on retiring without Social Security, however, you're probably not saving enough.

The fundamental problem of saving for retirement is making your money last longer than you do. Unless you plan to take up gorilla wrestling at 65, you have to figure out how long your savings must last.

One place to look: The Internal Revenue Service has tables that show how much you must withdraw from retirement plans at the year in which you turn 71.5. The IRS assumes that you're going to live 15.3 more years. If you have a spouse 10 years younger, the IRS assumes one of you will be around for 25.3 years, provided one, in particular, finally learns that the trash goes out on Wednesdays.

Another place to look is the mortality tables for group annuities, which the insurance industry uses. These say that a 65-year-old male retiree has a life expectancy of 19 years; a female, 21.7 years.

The problem: That's how long the average person lives. Many of those 65-year-olds will live longer.

So, let's look at it another way: What are the odds that a 65-year-old retiree will live to 90?

• Of the men now 65, 28 percent will live to 90, says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries. Eleven percent will live to 95, and 2 percent to 100.

• Women: 40 percent will live to 90; 19 percent will live to 95; and 5 percent will live to 100.

It makes sense, then, to assume that your savings will need to last 30 years. A simple retirement calculator would tell you that if your savings earned 9 percent a year, you could withdraw 8 percent of your money the first year and keep taking that amount for eternity. If you had $1 million in savings and earned 9 percent a year, you could take $80,000 a year, and still give your heirs a starter castle.

Unfortunately, it would also be a stupid retirement calculator. Why?

For one thing, the only investment that guarantees 9 percent these days is offered by felons. A 10-year Treasury note, for example, yields 4.24 percent.

The Standard & Poor's 500-stock index has returned an average 10.4 percent a year the past 40 years. The average balanced fund, which mixes 60 percent stocks and 40 percent bonds, has averaged a 9.3 percent annual gain the same period.

Unfortunately, those are just averages. If you retire at the onset of a bear market, the results are devastating. For example, the S&P 500 plunged 46 percent the 12 months ended September 1974. If you were taking 8 percent withdrawals, your account would be down 54 percent. Your withdrawals also would reduce gains in later years.

The other problem: inflation.

The American Association of Individual Investors used historical data from 1926 through 1995 to calculate the odds of a retirement portfolio surviving 30 years, using various withdrawal rates. The conclusions:

• Keep at least 50 percent in stocks, which will increase the odds of higher returns over time.

• Start by withdrawing 4 percent from your retirement portfolio. "Above that, you're rolling the dice," says John Markese, president of AAII.