(MoneyWatch) Americans are dangerously uninformed about how much savings they need to have on hand to fund a comfortable retirement and how to deploy those savings to generate a reliable retirement income. That's the conclusion I drew from a recent Wells Fargo study on retirement issues facing middle class Americans.
When middle class Americans were asked how much savings they'd need for retirement, the median answer was $300,000. To date, the median retirement savings these survey respondents actually reported was just $25,000. We have a problem!
When asked how much of their retirement savings they could withdraw during retirement, respondents' median answer was 10 percent. But if you withdraw from your savings at this rate, there's an overwhelming chance you'll experience "money death" before you experience actual death. According to a recent post by retirement expert Dr. Wade Pfau, there's a very good chance that a withdrawal rate of 10 percent will result in a retirement savings that's exhausted in 10 to 20 years -- well short of the expected average lifetime of people currently in their mid-60s.
Let's look at it another way. If you withdrew 10 percent from retirement savings of $300,000, your annual retirement income would be $30,000. Combined with your income from Social Security, it might be possible to have a livable retirement. And many people will be tempted to withdraw at this rate at the beginning of their retirement so they can afford their dream retirement and hope their money will last. But hope is not a good strategy.
Instead, many experts suggest a withdrawal rate of 3-1/2 or 4 percent per year. At that rate, $300,000 in retirement savings would produce an annual retirement income of $10,500 to $12,000; it'll be tougher to be comfortable in retirement with this level of income.
You could generate reliable retirement income higher than 3-1/2 or 4 percent by purchasing an immediate annuity; annuity payout rates can be 50 percent higher than with systematic withdrawals.
But each method of producing retirement income has its pros and cons, with differing amounts of retirement income. Learning how to generate reliable retirement income is the subject of my latest book, Money for Life: How to Generate a Lifetime Retirement Paycheck.
It's well worth your time deciding how to draw down your retirement savings and determining how much money you really need to retire. This can help you make important life decisions about when you can afford to retire, whether you need to work during your retirement years, and how much to pare back your living expenses to make your savings last. But you're much better off planning ahead rather than waiting until your money runs out and having limited options.