Given the flood of often confusing and conflicting information from financial services firms, market pundits and the media, it’s easy to lose sight of what really matters when it comes to retirement planning. No doubt that’s one reason only 32% of American workers surveyed by Personal Capital reported they are very or somewhat prepared for retirement. But there’s an easy way to improve your odds of a secure post-career life: Focus on the fundamentals, which can be boiled down to these four key questions:
1. Are you saving enough? How much is enough? Well, if you get started early in your career and experience no disruptions to your savings regimen, you may very well be able to build a nest egg well into six or even seven, figures by stashing away 10% of pay each year, especially if your employer is throwing some matching funds into your 401(k). But not everyone gets that early start and sticks to it. So I think a more appropriate target—and one cited in a Boston College Center for Retirement study—is 15% a year.
Of course, if for whatever reason you’re getting a late start on your retirement planning, you may have to resort to more draconian measures, such as ratcheting up your savings rate above 15%, putting in a few extra years on the job before retiring and scouting out innovative ways to cut expenses and save more. There are a number of free online calculators that can help you estimate on how much you should be saving to have a reasonable shot at a comfortable retirement. Don’t despair if the figure the calculator recommends is too high. You can always start with an amount you can handle and then increase it by a percentage point or so a year until you reach your target rate.
2. Do you have the right investing strategy? By the right strategy, I mean tuning out the incessant Wall Street chatter and the pitches for dubious investments and concentrating instead on building a well-balanced portfolio that jibes with your risk tolerance while also giving you a reasonable shot at the returns you need to achieve a comfortable retirement. Fortunately, that’s fairly easy to do. Start by gauging your true appetite for investment risk by completing this free 11-question risk tolerance-asset allocation questionnaire from Vanguard. Then, using the mix of stocks vs. bond funds the tool recommends as a guide, create a portfolio of broadly diversified low-cost index funds.
The portfolio doesn’t have to be complicated. Indeed, simpler is better: a straightforward blend of a total U.S. stock funds, total U.S. bond fund and total international stock fund will do. The idea is to keep costs down—ideally, below 0.5% a year in annual fund expenses—and avoid toying with your stocks-bonds mix except to rebalance every year or so (and perhaps to shift your mix more toward bonds as you near and then enter retirement).
3. Are you fine-tuning your plan as you go along? Retirement planning isn’t a task you can complete and then put on autopilot for 20 or 30 years. Too many things can change. The financial markets can take a dive, a job layoff might upset your savings regimen, a health or other emergency could force you to dip prematurely into your retirement stash. So to make sure that you’re still on track to retirement despite life’s inevitable curve balls, you need to periodically re-assess where you stand and determine whether you need to make some tweaks to your plan.
The best way to do that is to fire up a good retirement calculator that uses Monte Carlo simulations. For example, by plugging in such information as your current salary, retirement account balances, how your investments are divvied up between stocks and bonds and your projected retirement date, the calculator will estimate your chances that you’ll be able to retire in comfort if you continue on your current path. If your chance of success is uncomfortably low—say, below 80%—you can see how moves like saving more, investing differently or postponing retirement might improve your retirement outlook. Doing this sort of evaluation every year or so will allow you to make small adjustments as needed to stay on track, reducing the possibility of having to resort to more dramatic (and often more disruptive) moves down the road.
4. Have you developed a retirement income strategy? If you’ve successfully dealt with the three questions above, you’re likely well on the path to a secure and comfortable retirement. But there’s one more thing you need to do to actually achieve it: Develop a plan for turning your retirement nest egg into reliable income that, along with Social Security and other resources, will provide you the spending dough you need to sustain you throughout a long retirement.
Typically, creating such a plan involves such steps as doing a retirement budget to estimate how much income you’ll actually need to maintain an acceptable standard of living in retirement; deciding when to take Social Security to maximize lifetime benefits; figure out how much of your retirement income you would like to come from guaranteed sources like Social Security, pensions and annuities vs. draws from savings; and, setting a reasonable withdrawal rate that will provide sufficient income without too high a risk of running through your nest egg too soon.
Clearly, you’ll also want to devote some time to non-financial, or lifestyle, issues, such as thinking seriously about how you’ll live and what you’ll do after retiring, whether you’ll stay in your current home or downsize or, for that matter, even relocate to an area with lower living costs to stretch your retirement budget. But if you want a realistic shot at a secure and comfortable retirement, you need to answer the four questions above.
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 protected]. You can tweet Walter at @RealDealRetire.
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