How Much Retirement Funds Are Enough?

RETFueled by low interest rates, stock and bond prices have been kind to savers in recent years. But don?t sit back and admire your fat 401(k) balance. That same depression in rates is killing you on the other side of your balance sheet.

We?re talking about the cost of funding a retirement income stream. You probably know that this liability is big. But if you are like most investors, you don?t know how to calculate the number, and you don?t have a clue about what kind of roller coaster it has been on.

Did you think 2014 was a good year? The overall bond market delivered a 6% return, big-company stocks 13.5%. But if you are now 60, your retirement liability shot up 28% in those 12 terrible months. You got poorer.

What happened? Funding a steady cash flow in retirement is like buying a collection of zero-coupon bonds due in each year of your remaining life. When rates fall, as they did last year, prices of zeroes go up.

Says Chip Castille, a retirement expert at BlackRock BLK -0.72%: ?The cost of retirement is the most volatile thing on [a saver’s] balance sheet.?

In olden times employers had this hot potato. The obligation to pay pensions was sometimes big enough to sink a company. It kept financial officers awake at night. And so they came up with a way to sleep better. They offloaded the liability on employees, replacing volatile pension contributions with predictable 401(k) matches.

Now you get your quarterly retirement account statement, showing assets. Not shown: the liability number. That?s a big omission.

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