Nearly 60% of those polled for TIAA’s recently released 2016 Lifetime Income Survey said they’re confident they’ll be able to turn their savings into income that can support them in retirement. Unfortunately, fewer than half of the people surveyed know how much they have in those accounts or have tried to assess how much retirement income their savings can actually generate.
Confidence is nice, but it should be grounded in reality. Here are three key questions you should ask yourself to ensure your planning reflects a realistic assessment of your retirement prospects.
1. Is your savings rate high enough to build an adequate nest egg? When researchers for the Employee Benefit Research Institute’s 2016 Retirement Confidence Survey asked workers what percentage of salary they need to save in order to live comfortably in retirement, the majority estimated they’d have to put away at least 15% of their income each year. But many, if not most, Americans aren’t saving anything close to that. According to a June Transamerica Center for Retirement Studies survey of 401(k) plans, the median percentage of annual salary going into 401(k) accounts is just 8%.
There’s no single savings rate that’s right for everyone. Putting away 15% of salary a year is a frequently cited target that may be okay for many people. But the fact is that the percentage of income you should save to have a good shot at maintaining your standard of living throughout retirement can vary depending on factors such as how early in your career you begin to save, how you invest your savings, the age at which you plan to retire and how much you earn during your career. (Generally, the more you earn, the more you’ll need to save, as Social Security will replace a lower percentage of your pre-retirement income.)
Which is why it’s important to arrive at a savings rate that reflects your particular situation. You can do that by going to the Are My Current Retirement Savings Sufficient? tool in the Calculators section of MONEY’s site. By revisiting the tool every year or so and inserting updated information about your age, earnings and savings balances, you can then determine whether you need to adjust your savings rate.
2. Are you investing reasonably? Employee Benefit Research Institute data on how 401(k) savings are divvied up between stocks and bonds suggests that participants’ allocation decisions generally make sense. For example, stock exposure is highest for people in their 20s (just under 80%) and then declines for older age groups until bottoming out at a bit more than 55% in stocks for those in their 60s.
But these broad percentages can hide a multitude of sins. For example, the stats also show that about 8% of the youngest 401(k) participants hold no stocks at all and more than 20% of the oldest have 80% or more of their savings in equities. What’s more, many investors jeopardize their shot at building an adequate nest egg by making such common investing faux pas as concentrating too much of their assets in a few market sectors, chasing yesterday’s hot performers or investing in gimmicky funds.
The best strategy: Start by making sure you’ve got a mix of stocks and bonds that makes sense given your tolerance for risk and how long you expect to have your savings invested (which you can do by completing Vanguard’s free online risk tolerance-asset allocation questionnaire). Next, focus as much as possible on broadly diversified low-fee funds, ideally index funds. And then, aside from occasional rebalancing, stick to your stocks-bonds mix and resist the urge to tinker with your holdings because the market is sinking or soaring (or seems about to do so).
3. Do you have a realistic idea of how much you can safely draw from your nest egg? Gauging how much you can withdraw from your assets annually over a long retirement is no easy task. So it’s not surprising that so many people get it wrong, with most overestimating how much they can draw from savings each year.
But whiffing on this crucial element of retirement planning can have severe consequences. Aside from the obvious downside that you may outlive your savings, assuming your retirement accounts can generate more sustainable income than they’re actually capable of could lead you to conclude that you’re ready to retire when in fact you should spend a few more years in the workforce to fatten your nest egg.
You can get a pretty good sense of how much you can safely pull from your retirement accounts each year by going to a tool like the American Institute for Economic Research’s Retirement Withdrawal Calculator, which you’ll find along with other useful resources in the Tools & Calculators section of my Retirement Toolbox. Just plug in such information as your age, savings balance, the percentage of your savings invested in stocks, what you’re paying in investment fees and how high a level of assurance you want that your savings will be able to to support you throughout retirement (say, an 80% or 90% probability), and the calculator will estimate how much you should withdraw.
Of course, no tool can predict exactly how long you’ll live or how the markets will perform. But if you go through this process every year or so with updated information and adjust your withdrawals when necessary as you go along, you’ll certainly have a much better chance of not outliving your nest egg (or ending up with a huge pile of assets late in life that you could have enjoyed spending early on) than if you pull money from your nest egg with no plan at all.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com. You can tweet Walter at @RealDealRetire.