Get Real
Presenting U.S. News's ultimate retirement calculator--the essential tool you need to plot your strategy for the future
There is a second, more subtle truth to remember about raises: If your income keeps rising, you'll probably expect a higher standard of living in retirement, which will increase the total savings you'll need to accumulate. Many of today's affluent retirees, for example, would not be pleased if forced to return to the same standard of living they had at age 25 (even if they might yearn to be 25 again for other reasons). Thus, if you do receive an unexpectedly large raise and develop more expensive tastes as a result, you'll probably want to recalculate your savings needs.
What sort of raises should you expect over your remaining lifetime? It's great to believe in your own star, but it's also useful to know what the law of averages says. Frank Levy, an economist at the Massachusetts Institute of Technology, has studied the wage history of families of different ages and different levels of education. Families headed by a man with only a high school degree have fared particularly poorly in recent decades. A husband in such a family who was 30 years old in 1979 typically saw a rise of only 12 percent in his income by the time he turned 40, after adjusting for inflation. After that, his real income actually declined, and by age 45 he was making less than at age 30 in real terms.
College graduates in the same age group had more upward mobility, but still far less than their fathers enjoyed. In families headed by a man with a college education, the husband typically saw his income rise by about one third between ages 30 and 45--just over 2 percent a year.
In estimating your own earnings prospects, beware of overgeneralizing from early successes. For most workers, wage gains peak in their 40s. For example, among husbands age 40 in 1979, even those who were college graduates saw relatively flat earnings before they turned 55, and those with only a high school education lost ground. Assuming a career average of 1 percent real wage growth per year, which is what the calculator reproduced in these pages assumes, is probably prudent for most people (the version of the calculator on our Web site allows you to pick your own number).
Projecting how long you'll want to work, or how long you'll be able to, also depends on individual circumstances, but, again, caution is in order. Older workers in the next century may well be more valued, since there will be relatively fewer younger workers competing for their jobs. Still, you shouldn't assume you can work forever at the wages you think you deserve. Rapid technological change is likely to continue, rendering job skills that are lucrative today obsolete. Today, 70 percent of men over 60 are no longer in the work force, and more than a few feel pushed out.
The bull-market illusion I'll make the same return on my savings in the future as I made in the past.
From 1982 to 1997, the stock market yielded a compound annual average return of 12.8 percent, even after adjusting for inflation. Can you count on having this performance continue? Many boosters now proclaim the existence of a new economy, built on high technology and streamlined management, that will lift American productivity and stock values ever higher. But the lessons of economic history suggest otherwise. According to Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, the long-term real return on stocks has been just 7 percent.
advertisement
