What you need to know about your retirement forecast
An increasing number of retirement plan providers are offering tools using symbols and metrics like these to indicate whether you might be on track for retirement. Here’s what you should and shouldn’t do.
1) Do use a retirement calculator. A good one can help you figure out how much to save to reach your goals. If your employer offers one, consider using it.
2) Don’t get too discouraged by a poor forecast. Feeling overly discouraged or overwhelmed can actually prevent you from taking the actions you need to improve your retirement forecast. As you’ll see, your retirement picture may not be as dire as it seems. If there are changes that need to be made, understand that seemingly small steps can make a profound impact on the quality of your life down the road.
3) Do verify the Social Security numbers. The Social Security benefits in your employer’s program are likely based only on the years worked at there. If your previous jobs paid a lot more or less or if you had a long period of not working, those estimates may be way off. For more accurate numbers, run an online estimate. If you’re married or divorced from someone you were married to for at least 10 years, be aware that you’re eligible for the greater of your benefit or a spousal benefit equal to one half of your spouse’s or ex-spouse’s full benefit at your full retirement age.
4) Do factor in all sources of income. Your program probably includes your employer’s pension plan if you’re fortunate enough to have one, but will you be eligible for any pension benefits from another job? If so, you’ll want to get a projection of that pension too. Don’t forget to include any rental, annuity, or other income you’re expecting in retirement.
5) Do add in outside assets. The program is probably only looking at your employer’s retirement plan. See if you can add in outside assets like retirement accounts from previous jobs, IRAs, and other investment accounts for retirement.
6) Don’t forget your spouse if you’re married. Be sure to include their Social Security benefits, other retirement income, and assets as well. You may also want to see if they have a similar tool in their plan that you may prefer using.
7) Do use an above average life expectancy. Many programs use the average life expectancy, but there’s about a 50% chance you’ll live longer more than a 50% chance if you’re above average in health, lifestyle, or longevity in your family. It’s better to be safe and assume a longer life expectancy than sorry if you outlive your money.
8) Do consider changing your investment allocation. If the program offers free investment recommendations based on your risk tolerance, consider following them as they can boost your expected investment return without taking too much risk.
9) Don’t just assume historical returns. There have been 10-20 year periods of superior investment returns that were followed by 10-20 years of subpar returns so don’t get fixated on even the last couple of decades. Instead, make sure your calculator assumes a return of no more than 4-6%. Anything you earn above that is gravy.
10) Do figure out how much income you really need in retirement. The program assumes you need a certain percentage of your current income in retirement. However, that number may not be right for you. To get a better sense of your needs, take a look at the last 3 months’ of your bank and credit card statements and record your current expenses.
Then think about how they may change in retirement to create a retirement budget. For example, will your mortgage and other debts be paid off? Will you spend less or more eating out? Do you plan to do a lot of travel or do you have other expensive hobbies? Finally, use a this calculator to estimate your effective tax rate (don’t worry about inflation since the numbers adjust with inflation) and divide your total expenses by (1 minus the tax rate) to determine how much retirement income you need before taxes.
11) Do make changes if necessary. Does your retirement still look cloudy or are you still stuck at that red stop light or with a retirement age that’s later than you’d like? See how much more you would need to save and look for ways to cut back on expenses to free up the money. You may also need to adjust your retirement age or income expectations to something more realistic.
12) Don’t just forget about it. You’ll probably want to revisit your retirement plan about once a year. After all, your situation and goals will probably change over time. Periodically checking your progress will allow you to make any adjustments needed to keep you on track.
Retirement planning tools are becoming increasingly more sophisticated and available to employees, often at no cost to them to use it. However, they won’t do you much good if you don’t use them or use them the wrong way. Don’t you think it will feel a lot better to see that sunny day, green light icon, or early retirement age and know you’re on the road to a happy and secure retirement?