The unpleasant reality of saving for retirement

The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases, The Wall Street Journal reports.

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston Collegel. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings.

Megan McArdle, the business and economics editor for The Atlantic, writes:

Most people  likely to be reading this blog should be targeting a savings rate in the range of 20-25% of income, more if they can manage it.  Since this is approximately five times what the average American household is saving, this notion is likely to be met with fierce resistance by readers who can name an endless list of claims on their income: mortgage, utilities, car, kids' activities, clothes, visits home to see the family . . . 

Say you're a 40 year old couple with 100,000 a year in after-tax income, and you save 5% of that, the way ordinary Americans do.  (Assume further that it all goes in retirement).  $5,000 a year at 5% until the age of 68 will leave you with $293,000 in retirement funds, which works out to about $1,000 a month in combined investment returns and withdrawals if you assume that you will live to 88.  On top of your Social Security benefits, your household will probably net about $4,000 to $6,000 a month.  But you're used to living on almost twice that.

This will mean rather dramatic changes in how we measure the good life.