A $1000 per month pension equals $300,000 in savings
Too much recent travel, but my wife referred me to this article by Lynn Parramore* (originally published here) on how the 401(k) “revolution” was a big bust for the middle class, something I have also written about. I just wanted to add one quick point to her discussion.
Parramore references the common recommendation that you have at least $1 million in savings to retire. This is usually related to the “rule” that you can take 4% of your savings per year and not exhaust it. That would give you $40,000 per year in income. However, with low interest rates and flat stock market performance (the S&P 500 just topped its 2000 peak this spring), even 4% may be too high as you run a greater risk of outliving your savings.
The flip side of that rule, which I haven’t seen mentioned anywhere else, is that a $1000 per month pension equals at least $300,000 in savings (in terms of retirement income), as $300,000 times 4% is $12,000 per year. If 4% is too high, then its value is even greater. If you can only take 3% of your savings per year safely, it would be equal to $400,000 in savings, for example.
This shows how important it is to protect pensions where they do exist, primarily at the state and local government level. They are being chipped away at varying rates, mainly but not exclusively in red states. Oregon, for example, looks set to cut state pensions in a special legislative session via reductions in cost of living adjustments similar to the idea of using a less generous inflation measure for Social Security to provide backdoor cuts.
It should be obvious that this is even more true for Social Security, since everyone is eventually eligible for benefits. That is why I have argued that expanding Social Security is the best solution to the coming middle class retirement crisis.
* Disclosure: Lynn Parramore is the editor at AlterNet who commissioned my article there on state and local government subsidies to business.
Cross-posted at Middle Class Political Economist.
There is a slight problem with your estimate: If you go to immediate annuities.com you find that for 1000 per month at age 65 you would pay 169k for a yield of 7.1%. Of course this leaves nothing when you die. Your example is based upon living on the income only, which if held outside an annuity is necessary, however an immediate annuity moves the longevity risk to the annuity payer. These examples are for Texas at age 65 and a male. 300k would get you 1770 a month on a single life annuity. An immediate annuity is more comparable to a pension than just living off the interest.
A “less generous inflation measure”? Who besides right wing critics of the safety net says (with a straight face) that the CPI-U or the CPI-W is “generous” — i.e., that it is not right and is too favorable to retirees? Why are we stupid enough to accept Washington Post wording for things like this?
Has anyone around here heard of the concept of “framing” and why it matters?
Lyle, you are correct, thanks. That means the $1000/mo. would only require about $200,000 in savings ($169,000 in your example here, but as you say at Middle Class Political Economist, it depends on payout rates and settlement options). It doesn’t undermine the importance of pensions and Social Security, but this is a better apples to apples comparison. Thanks again.