Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

When it comes to retirement, experts often underscore the importance of checking up on the viability of your retirement plan throughout your accumulation years: The sooner you course-correct, the less painful any remedies are apt to be.

But what if you are getting close to retirement? Savings benchmarks can be a useful starting point to gauge retirement readiness for you, too—and you can refine them further by factoring in your marital status, salary, expected retirement date, anticipated/desired standard of living in retirement, and nonportfolio sources of income.

But if your retirement date is close at hand, you can and should put an even finer point on whether you have set enough aside for retirement or if you have more work to do. For one thing, you will have a much clearer view of what your spending in retirement will look like than you did 30 years earlier, as well as your planned retirement date. You will also be certain about any nonportfolio financial resources you will be bringing into retirement—whether you will have any income from a pension, for example, or how much of your cash-flow needs will be provided by Social Security. Your investment portfolio’s asset allocation can help you make an informed guess about its long-run return potential.

Armed with a more refined view of your personal variables, you can use research about sustainable withdrawal rates to assess your retirement plan’s viability. Whether you can afford to retire—and what kind of spending rate to use when you eventually do—is such an important question that this life stage is the ideal time to seek advice from a financial planner.

Benchmarks Are a Starting Point
There is no shortage of age-based retirement savings benchmarks available online, each using a slightly different methodology and employing varying assumptions. Checking several of these benchmarks and employing your own information is a good starting point for evaluating the viability of your retirement savings.

For example, one financial institution has developed its “savings factor”: The baseline savings target for people getting close to retirement is 8 times salary at age 60 and 10 times salary by age 67.

Another institution has developed its own retirement savings benchmarks (age-based savings targets as a multiple of current income). The firm’s baseline target for people age 65 is 11 times household income, but the institution expresses its savings benchmarks as a range based on income level, marital status, and whether the investor is the sole earner or part of a dual-income household. The savings target for a 65-year-old married person who is the sole earner and has an income of $75,000 is 8 times current household income, for example, while a 65-year-old single person with an income of $250,000 should shoot for a savings pool of 14 times current income.

Why is income such a big swing factor in these benchmarks? The key reason is that Social Security replaces a higher percentage of working income for people at lower income levels than it does for higher-income workers. In other words, higher-income workers will be more reliant on their personal savings than is the case for people in lower income bands.

Putting a Finer Point on It
Benchmarks like these can provide a quick check on what your retirement savings “number” should be, factoring in the really high-impact variables. But as you get closer to the rubber hitting the road for your retirement, it makes sense to approach this question with an even more customized approach.

The key starting point is to take a closer look at your planned in-retirement spending. “Income-replacement rate”—how much of your working income will you need to replace in retirement—is a commonly used concept in the retirement-planning arena. And 75% to 80% is often held out as a good benchmark. But one research expert, has identified that there is a huge level of variability in income-replacement rates, ranging from 54% to over 87%. The interesting wrinkle here is that even though having a lower salary calls for needing a lower savings target, as discussed above, people with lower salaries tend to require higher income-replacement rates. That seeming contradiction owes to the fact that people in lower income bands are oftentimes able to save a smaller percentage of their incomes—because more of their income is needed for essential expenditures—than is the case for higher-income workers. When the high-income worker retires and stops saving, their income needs will automatically decline by their savings rates, but lower-income people will get less of a boost. (Of course, many retirees continue to save in retirement, too.)

Because of that variability in income-replacement rates, some may like the idea of looking line item by line item to detect any changes in your retirement spending versus what you were spending while you were working. Not having to save any more is one of the biggest positives for in-retirement budgets, but healthcare costs can cut into that benefit. As retirement draws close, drawing a bead on actual spending plans is much simpler than it is for younger people, for whom retirement is many decades into the future.

The next step is to take a closer look at any nonportfolio sources of income you expect to be able to rely on in retirement, such as a pension or Social Security. Modeling out anticipated Social Security income using your own work history and anticipated start date, like forecasting expenditures, is much easier to do if you are close to retirement than would be the case if retirement is 30 years from now.

By taking a look at anticipated annual spending and subtracting out how much of those expenditures will be met through nonportfolio sources, you will arrive at how much of your portfolio you will spend each year. You can then calculate your spending rate (or withdrawal rate) by dividing that amount by your current balance (or your expected balance at the time you retire). Armed with that figure, you can see whether your portfolio balance is, in fact, “enough,” based on what we know about sustainable spending rates. This is always a perfect spot to hire some help to ensure that you are thinking through all of the key variables.

 

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