Are you concerned that your retirement savings won't last? You're certainly not alone. A 2013…
When you’re setting out to travel to an unknown destination, the only way to be sure you’ll get there is to map out the route. The same goes for retirement – the only way to be sure you’ll be financially ready when the time comes is to run some numbers. Here are some suggestions for what to do.
Surveys by the Employee Benefit Research Institute found that less than half (46%) of workers have actually figured how much savings they’ll need to retire comfortably, and 44% of those relied on guesses, instead of a detailed review or professional guidance.
But guesswork is not usually a viable strategy, and denial is not just a river in Egypt. In order to avoid unpleasant surprises when you’re ready to walk out of your office for the last time, you’ll want to make sure you can sustain your lifestyle.
In a recent study, researchers found that 58% of the nearly 2,300 full-time workers age 35 to 60 who participated in the Federal Reserve’s Survey of Consumer Finances weren’t on course to a comfortable retirement. They also concluded that just under half of those didn’t realize that they were unprepared. On the flip side, the researchers also found that just over half of those who were actually preparing reasonably well for retirement didn’t consider themselves to be on track.
How can you tell whether you’re on course for retirement? Compare your savings to your required income in retirement. Run some numbers using realistic estimates.
Many retirement planning tools project future growth of your savings using historical stock market returns, or even ask you to enter estimates of your returns. But no one knows what will happen in the next decades. Will the market crash? Keep rising? Move sideways? What if another financial meltdown like 2008 happens?
It’s best to prepare for future uncertainty as well as you can. A retirement calculator like Vanguard’s uses Monte Carlo simulations to estimate the probability that your savings will support your desired retirement lifestyle. You enter your savings amount, the income you’ll need in retirement, and the expected length of your retirement. The calculator runs simulations under a large number of stock market scenarios—up and down markets of various lengths, intensities, and combinations, and tells you the percentage of simulations in which your savings lasted for the duration of your retirement. Instead of doing the simulations yourself, you can consult a financial advisor who can run the simulations and provide you a report.
If the tools show you have less than about a 75% chance of producing your needed retirement income, you’ll need to increase your savings rate. The best way is to contribute more to your retirement accounts or savings accounts. You could also invest more aggressively by investing more in stocks, especially faster growing stocks. But this approach comes with significantly increased risk. If you’re within a few years of retirement you likely won’t want to take this approach, as a sharp market downturn just when you retire can seriously derail your financial retirement plans.
Once you’ve come up with a plan to get to retirement, you’ll want to recheck with updated numbers every year or so, just to make sure you’re still on track, and make any necessary course corrections. Maybe your income needs have changed, or the expected length of your retirement.
If you really want to see if your retirement plan is fire-proof, you can check out the popular FIRECalc 3.0. This tool uses historical market data from 1871 to the present to determine how your retirement strategy would have withstood the Great Depression, inflation of the 1970s, and other historical calamities. If your savings plan would have withstood these, it’s likely to stand up under anything the market will do in the future.
A sound retirement depends on more than guesses and wishful thinking. By taking a detailed, clear-eyed look at your retirement plan, you’ll greatly increase your chances of enjoying a secure retirement.