The average American adult can meet the challenge of ensuring a resilient retirement income even in the absence of a fiscally challenged Social Security program. At retirement, the individual must have accumulated an endowment fund that will be sufficient to provide an annual income for life that will be comparable to the individual’s earnings in the final year before retirement.There is a clear path to retirement security: (1) Contribute 15% of annual earnings over a 40-year period to the individual’s retirement endowment fund; (2) target a minimum 7.5% annual rate of return on the investment portfolio of the fund; and (3) over a 30-year period following retirement, limit annual withdrawals from the retirement endowment fund to a maximum amount that is comparable to the individual’s final year earnings (adjusted for inflation).The average American head of household has annual earnings of about $75,000. For purposes of illustration, it is assumed that contributions equal to 15% of annual earnings are made over 40 years (say age 30 to age 70), while withdrawals are made over a 30-year period (assuming a remaining life expectancy of 30 years following retirement).
Patient investors with long-term horizons, such as pension funds and endowments, strive to meet the twin objectives of capital preservation and capital growth by using the following rule of thumb: Allocate 40% of investments for lower risk bonds (capital preservation), and 60% of investments for higher risk equities (capital growth). The suggested model investment portfolio for the retirement endowment fund is: 40% in long-term U.S. Treasuries and 60% in U.S.-listed equities.
