NEW YORK — I’m in my 30s and want to know whether I’m on the right track for retirement. How do I go about doing that? — Mike, Connecticut
The close of one year and the start of a new one is a good time to take a fresh look at your retirement planning to determine whether you’re making progress and, if not, take steps to improve your prospects. Unfortunately, many people fail to do such an assessment at any time of year. Fewer than half of workers have tried to calculate how much they need to save for a comfortable retirement, according to the Employee Benefit Research Institute’s 2015 Retirement Confidence Survey, and nearly 40% admit that they simply guess about how much they’ll need rather than do an analysis.
Which is a shame because evaluating whether you’re on track isn’t all that difficult. The easiest way to get a handle on where you stand is to rev up a good retirement income calculator that uses Monte Carlo simulations to make its projections. By plugging in such information as how much you’ve already managed to save, how much you’re contributing to retirement accounts each year and how much of your current income you’ll need to replace in retirement, you can come away with a pretty good sense of whether you’re making adequate headway toward a secure retirement.
There are several online calculators that can help you with such an assessment. I’m partial to the T. Rowe Price Retirement Income Calculator because it’s easy to use and, unlike other tools that attempt to identify your “Retirement Number,” or the size of the nest egg you need to accumulate in order to retire, the T. Rowe tool estimates the chance that you’ll be able to generate the lifetime income you’ll need to maintain your standard of living in retirement. By focusing on income rather than a lump sum, I think you end up with a better sense of where you stand, whether you’re making progress and how various moves might be able to improve your odds of success.
Here’s an example. Let’s say you’re 35 years old, earn $50,000 a year, have one year’s salary already saved for retirement and that each year you contribute 10% of pay to your retirement accounts. And let’s further assume that you invest your savings in a mix of 80% stocks-20% bonds. Based on that scenario, the calculator estimates that you would be able to generate 75% of your pre-retirement salary from a combination of Social Security plus draws from your retirement nest egg with a 56% chance of sustaining that income at least until age 95. In short, if you continue on the path you’re on in the example above, you have a little better than 50-50 shot at a reasonably comfortable and secure retirement.
But one of the benefits of doing this sort of analysis is that you can also easily see how you might improve your retirement prospects. Increase your annual savings rate from 10% of pay to 12%, for example, and voila! Your chances of retiring on 75% of your pre-retirement salary climb from 56% to 64%. Boost your savings rate to 15%, and the probability increases to 73%. And if you save at a 15% annual rate and stay on the job two more years, your chances jump to 86%, in part because your Social Security benefit increases by roughly 15% for delaying two years but also because the extra years on the job allow you to contribute more to your retirement accounts and provide more time for those accounts to grow.
By the way, people who are already retired should go through a similar analysis, except that instead of homing in on their saving rate and planned retirement age, they should focus mostly on whether they’ll be able to continue their current level of spending without outliving their nest egg. Retirees can use the T. Rowe calculator or the American Institute for Economic Research’s Retirement Withdrawal Calculator, as both essentially estimate how long your savings might last given your current rate of spending and how your money is divvied up between stocks and bonds. Whichever tool you use, I recommend retirees also do a retirement budget to get a more accurate sense of how much they’ll need to spend to maintain their standard of living.
I want to emphasize that these and similar tools yield projections, not certainties. A lot can happen over the course of a long career (and a long retirement) that no calculator or tool can foresee. The markets could take a nosedive or deliver subpar returns for a prolonged period. You might not be able to maintain your savings regimen because of a job loss. A financial emergency could force you to dip into your savings.
But by going through this sort of exercise initially and then and re-doing it periodically with updated information about the size of your retirement account balances, how much you’re saving or spending, etc., you can gauge your progress and make necessary adjustments as you go along. This sort of monitoring and occasional tweaking can give you a more realistic sense of whether you’re really prepared for your post-career life and prevent you from finding on the eve of retirement that you’re way, way behind where you need to be.
Ideally, you should combine this check-up with a review of your investments to ensure that your retirement portfolio is invested in a way that is likely to generate adequate returns while remaining consistent with your tolerance for risk. As part of that investment review, you may want to rebalance your holdings and even consider doing some tax-loss harvesting in taxable accounts, or selling shares to realize capital losses that can offset realized capital gains and, possibly, ordinary income. To have such losses count for the 2015 tax year, you must sell the shares before the end of the year. (If you do sell to realize a loss, take care that you don’t screw up the maneuver by running afoul of the “wash-sale” rule.
If you’re not comfortable doing this sort of retirement check-up on your own, you can always turn to a financial adviser for help. But if you eventually want to have a secure retirement, you need to find out where you stand and, if necessary, start making moves to enhance your prospects.