Investing Tip of the Month
Current and future retirees have some important advantages over folks who retired even a few decades ago. Thanks to advances in medicine and healthier lifestyles, a person retiring at 65 today can and should plan for 20 or more relatively healthy years.
But with improved longevity comes challenges. Given very long time horizons and the fact that the majority of today’s retirees don’t have pensions, the risk of a retiree outliving his or her nest egg is a very real one.
So how can you tell if your retirement portfolio is on the right track to sustain you for the rest of your life? Here are the key steps to take.
1. Estimate income needs.
The first step when gauging your retirement portfolio’s sustainability is to estimate your in-retirement income needs. (This will obviously be easier for those who are closer to retirement than it is for younger savers for whom retirement is 20 or 30 years in the future.)
As you do so, be realistic about what you’ll actually spend. Conventional wisdom had been that retirees will need about 80% of their preretirement expenditures, owing to savings in categories like commuting, lunches out, and not having to save for retirement anymore. In reality, some retirees actually spend more than they did when they were working, owing to big-ticket costs like travel and medical bills. Others, meanwhile, spend a lot less.
2. Estimate longevity.
How long does your portfolio need to last? Who knows? But it’s better to plan for a good long life rather than risk falling short and becoming a burden on your loved ones. You can use the Social Security Administration’s life-expectancy calculator (http://www.ssa.gov/OACT/population/longevity.html) to find the average life expectancy for someone of your age.
3. Gauge certain sources of retirement income.
The next step when determining your retirement portfolio’s viability is to round up any income you expect from sources other than your own retirement savings, including Social Security, part-time work, pensions, and annuities.
For a specific read on what you can expect from Social Security, use the Retirement Estimator calculator on the Social Security Administration’s website. Alternatively, you can submit a request for a personalized Social Security statement. Also, bear in mind that the amount of your Social Security income will depend on when you begin collecting.
If your Social Security benefits seem too skimpy, they might be. Not reporting name changes, using a name other than the one on your Social Security card, or entering an incorrect Social Security number can lead to inaccurate benefit calculations. Troubleshoot by checking your benefits every few years.
Projecting what your retirement or pension plan will provide requires more legwork. First, know the factors behind your expected future payments. Defined-benefit plans, such as a pension, often are linked to Social Security payments; consequently, a fatter Social Security benefit could mean a slimmer pension check. Second, be persistent about seeking information. Some plans will update you regularly about your benefits as you near retirement. Others aren’t as accommodating. Pester your employer’s human resources department for more information. If you get the runaround, turn to Washington. Call the Pension and Welfare Benefits Administration (800-998-7542) to find the Department of Labor office in your area.
4. Find the size and asset allocation of your retirement portfolio.
Now it’s time to get a current read on your investment portfolio. Gather up your most recent statements for all of the assets you have earmarked for retirement–IRAs, company retirement plans, and taxable accounts.
Enter each of those holdings into Morningstar Investment Research Center’s Portfolio X-Ray tool. Take note of your aggregate retirement savings amount (the total dollar value of portfolio), then click View X-Ray. Jot down how much you have in stocks, bonds, and cash.
5. Determine whether your current portfolio will support your desired level of income.
Armed with these key pieces of information–your expected income needs and longevity, your portfolio size and asset allocation, and your expected income from other sources–you’ll be able to make a reasonable judgment about your portfolio’s sustainability.
6. Make necessary adjustments.
Does your retirement portfolio appear to be on track? If so, give yourself a pat on the back and stick with your savings program; you’re obviously doing something right. But if it looks likely that you’ll fall short, you’ll have to tweak whatever variables you can–save more, work longer, invest more aggressively, or all of the above.
A version of this article appeared on Morningstar.com on Feb. 16, 2011.
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