The year is already past the midway mark. Yet with all the hoopla surrounding the stock market hitting new highs, you may have gotten distracted from checking in on how your retirement plan is progressing.
That’s understandable, but you don’t want to put off your mid-year retirement checkup too long. Here are the three things you should do now to determine if your retirement plan is still on track — and if not, how to improve your outlook.
1. Determine where you stand now.
The idea here is to see whether what you’re currently doing to prepare for retirement is actually working — in other words, whether you have a realistic shot at a comfortable retirement if you continue on your current path.
You can do this sort of evaluation by going to a retirement tool like T. Rowe Price’s Retirement Income Calculator, which you can find along with other tools in RealDealRetirement’s Tools & Calculators section.
Enter such information as your age, salary, retirement account balances, the percentage of pay you’re contributing to those accounts each year, the age at which you’d like to retire, and your projected Social Security benefit. (The calculator will estimate that for you — or you can go to Social Security’s Retirement Estimator and get a figure based on your earnings history and expected future earnings.)
The tool will then calculate the probability that withdrawals from your savings plus Social Security benefits will be able to generate the income you’ll need throughout retirement.
Generally, you’d like your chances to be in the neighborhood of 80% or so, if not higher. If they’re well below that level, that’s not necessarily cause for panic. Rather, it’s a sign that you probably need to change things up a bit — say, by saving more or planning on delaying retirement a couple of years to give your nest egg more time to grow.
The point is that by going through this exercise periodically and seeing whether your probability of success is trending up or down, you can get a more realistic sense whether you’re making progress toward a secure retirement.
2. Take a hard look at your retirement investments.
It’s always a good idea to step back from time to time and review your investing strategy. But doing so is especially critical in today’s market.
What’s more, since stocks have been on a tear for nearly eight and a half years — returning more than 300% over that period vs. about 40% for bonds — your portfolio may have morphed into one that’s be a lot riskier than you think. For example, a portfolio that was invested in a mix of 60% stocks and 40% bonds in early 2009 would be roughly 80% stocks and 20% bonds today, if you reinvested all gains but didn’t rebalance over that period.
So how do you know whether your savings are invested appropriately? Start by calculating how your portfolio is currently divvied up between stocks and bonds, which you can do by plugging the names or ticker symbols into Morningstar’s Instant X-ray tool. Once you’ve ascertained that breakdown, you can go through the process I detail in this column to decide whether you should stick with your current mix or change it.
Your aim, though, should be to make sure your investing strategy is aggressive enough to earn the returns you’ll need to build a nest egg large enough to support throughout retirement yet not so aggressive that you’ll panic and sell your stock holdings when the market goes into one of its periodic slumps.
3. Build in a safety cushion.
Even if it appears that your retirement planning is on track, you’ll still want to improve your odds. The reason: Life often throws you curveballs that can disrupt even the best-laid retirement plans.
For example, a new study from the National Endowment for Financial Education by New School for Social Research economist Teresa Ghilarducci found that 60% of American workers experienced an unemployment spell lasting a year or more during which they earned no income, while more than three-quarters experienced four or more “income shocks” during which their earnings dropped 10% or more.
The same research also found that poor health can reduce the size of a retirement nest egg by more than $85,000 on average.
While there may be little you can do to avoid such setbacks altogether, you can take measures to mitigate their impact. For example, Ghilarducci notes that by keeping an emergency fund equal to three to six months’ worth of living expenses on hand, you may be able to weather bouts of illness and unemployment without tapping retirement accounts, or at least not dip into them as much as you otherwise would have.
Similarly, pushing yourself to save even just an extra percentage or two of salary a year throughout your career can significantly boost the size of your nest egg, which in turn can provide more of a cushion for dealing with income shocks or other disruptions.
Doing periodic checkups along the lines I’ve outlined can’t guarantee you’ll be able to retire in the style you envision. But by monitoring your progress regularly and making tweaks to boost your prospects, you’ll certainly be less likely to arrive at the threshold of retirement only to find you’re not nearly as prepared as you think.