An article with the hopeful title: “How to Catch With Your Savings” appeared in yesterday’s WSJ. The article’s takeaway – save a lot more, wait as long as possible to take income – is certainly true enough. However one of the article’s three primary financial illustrations was way, way off.
The illustration in question is as follows:
“Financial Engines looked at scenarios for a 50-year old earning $65,000. Putting 6% of that salary per year in a mix of stock and bond funds would likely lead to a portfolio at age 65 that should generate $31,700 of income annually for life.”
As several commenters on the article noted, an annual lifetime income of nearly $32k after only 15 years of savings seemed too good to be true. So I ran the numbers using these assumptions:
- Our 50-year, Bob, old gets 3% annual raises
- The average annual return of his balanced portfolio is 5%*
The result of 15 years of savings was a portfolio worth $106,667. To maximize his income, suppose Bob leverages mortality credits and purchases a life-contingent annuity. According to www.immediateannuities.com, Bob would get a check for about $637 per month, or $7,644 annually – less than ¼ of the $31,700 in the illustration.
Earlier in the article, the author stats that “[t]here’s no disputing that the math isn’t pretty after getting a late start on retirement saving.” How right he was.
Either Financial Engines miscalculated (less likely) or some key facts – perhaps that the
