Half of Americans are not on track to generate enough post-career income to cover their essential expenses in retirement, according to a recent survey of nearly 3,200 working adults by Fidelity Investments. Of course, that also means that the other half is mostly on track. Question is, do you know whether you’re on the right side of this 50-50 divide? Before you answer, I suggest you check out the five red flags below, each of which could be a caveat that you need to review your retirement planning.
You may need to reboot your retirement strategy if…
1. You have less saved than you should given your age. As important as it is to save for retirement, so too is it crucial to make sure have enough stashed away at various points in your career to be on track toward a secure retirement.
One way to get a quick sense of whether you’re actually making sufficient progress is to go to Fidelity’s Get Your Retirement Savings Factors, a tool helps you estimate how many multiples of your current annual salary you should have saved in retirement accounts at various ages, depending on the age at which you plan to retire and the type of lifestyle you envision upon retiring.
So, for example, if you’re 35 and hope to retire at 65 and maintain your current lifestyle, the tool estimates that you should have two times your salary saved at 35, seven times pay by the time you reach age 50 and 12 times salary at 65. You can change the assumptions for your retirement age (anywhere from 62 to 70) and your preferred retirement lifestyle (below average, average and above average), but other assumptions, such as a 15% annual savings rate and the tool’s estimate of how much you’ll receive from Social Security, are baked in. (If you’d like to change those assumptions as well—and spend a bit more to get results—you can go to a tool like T. Rowe Price’s Retirement Income Calculator.)
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If you find after going through this process that your nest egg is much smaller than it ought to be, you know that at the very least you’ll need to ramp up your savings rate. And if you’re late in your career and seriously lacking in savings, you may also have to re-think your planned job-exit date.
2. You lack a coherent investing strategy. How can you tell if you have a sensible investing strategy? Here’s one way: If you start moving money in or out of stocks depending on whether you think the market is ready to surge or go into a tailspin (both have seemed like possibilities the past few weeks), you don’t have a disciplined approach to investing. You are winging it.
The foundation of a sound retirement investing strategy is setting a diversified mix of stocks and bonds that’s aggressive enough to generate returns that can grow your portfolio during your career and help maintain its purchasing power during retirement—yet conservative enough so you won’t bail out of stocks every time the market heads south. In short, you want a portfolio you’ll be comfortable sticking with regardless of what’s going on in the financial markets.
To get an idea of what blend of stocks and bonds might be right for you, check out Vanguard’s free risk tolerance-asset allocation questionnaire. After you answer 11 questions designed to gauge how you might react to market setbacks and when you’ll need to start tapping your investments for income, the tool will recommend a mix of stocks and let you see how that mix as well as others more conservative and aggressive have performed in the past under different market conditions. Once you’ve settled on a stocks-bonds allocation that you feel provides the right balance of risk and return, you should largely stick to it, except to rebalance periodically and perhaps gradually shift to a more conservative mix as you near and enter retirement.
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3. You underestimate how much time you’ll likely spend in retirement. Underestimating the number of years you may end up living in retirement can wreak havoc with your retirement plans. If, for example, you figure you need to save enough for only 20 years of retirement and you end up living 30 years after calling it a career (which is likely for a great many people), you’ll probably enter retirement with a smaller savings stash than you’ll need. And whatever size nest egg you have come retirement time, you’ll run the risk of spending it too quickly if you misjudge how long it might actually have to support you.
So how can you plan realistically for retirement given that you don’t know exactly how long you’ll live? Well, you can at least get a more nuanced sense of how long you might around by going to the Actuaries Longevity Illustrator, a tool created by the American Academy of Actuaries and the Society of Actuaries. You enter your age and sex, select smoker or non-smoker and indicate whether your health is poor, average or excellent, and the tool will calculate your chances of living to specific ages (75, 80, 90, etc.) or for a given number of years (15, 20, 30, etc.).
We’re talking estimates here based on mortality data of the U.S. population from the Social Security Administration, not iron-clad guarantees. But with a decent idea of your probability of living to various ages, you should be better able to gauge how much you’ll need to save during your career how many years you may be depending on your nest egg to support you.
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4. You don’t have a plan for generating reliable retirement income. Creating a strategy for getting the income you’ll need from Social Security, any pensions and your savings is something you probably don’t need to focus on seriously until you’re in the home stretch to retirement, say, 10 or so years before leaving the workforce. But it’s a task that requires your full attention, as getting it wrong could relegate you to a less secure and enjoyable retirement.
Start by deciding when to start collecting Social Security benefits. Generally, you’re better off doing so later rather than sooner, as your benefit rises by roughly 7% to 8% for each year you delay between age 62 and 70 (after which you receive no increase for waiting), although the strategy that’s right for you can depend on such factors as your health and what other resources you can tap for retirement income. If you’re married, you and your spouse may also be able to boost the amount you receive over your lifetimes by coordinating when each of you take benefits. Since poor claiming decisions and other mistakes can potentially cost you tens of thousands of dollars, you may want to consult a professional or an online Social Security service for help.
Next, you’ll want to settle on a reasonable withdrawal rate for pulling money from your nest egg to supplement Social Security—that is, a rate that’s not so high it’s likely to deplete your assets too quickly, nor so low that you end up sitting on a big pile of cash in your dotage, along with regrets you didn’t spent more freely earlier on. Finally, you may want to consider whether it makes sense to devote a portion of your savings to buy more guaranteed income than Social Security alone will provide.
The important thing, though, is it have a retirement income plan ready to go well before you leave the workforce. Otherwise, you could find out too late that you won’t have sufficient income to lead the post-career lifestyle you envisioned after all.