Wednesday, December 7, 2011

More results for "Getting on Track for a Sustainable Retirement"

In October, I published “Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work” in the Journal of Financial Planning. The article explains the full methodology. 

I suggest that the way to know if one is on track for a sustainable retirement is to consider hypothetical individuals with the same current situation and retirement plans, but who reached their current age at different points in history. See how these hypothetical individuals fared over rolling periods from the historical data. Determine what else must be done (what savings rate is needed over how many more years of work) so that all the hypothetical individuals from history facing the same current circumstances could have retired successfully. This provides a recommended strategy calibrated to history’s worst-case scenario. In most cases, such extremes were not necessary, but there is always a possibility that one’s own retirement period will create a new worst-case scenario. 

For today, I received a request from a financial planner for some additional tables which may be more informative for people planning their retirements. I include these tables below, for 35, 40, 45, 50, and 60 year olds. These tables are different from what I've posted before because they assume an 80% replacement rate and different stock allocations.  A couple things to keep in mind about these tables:

-they are calibrated to the worst-case scenario in history and assume you will live to 100

-but they do not include the effects of account fees

-they assume that the stock allocation stays fixed your whole remaining life

-they assume you maintain a constant salary in real inflation-adjusted terms until you retire

-they assume your current wealth accumulation is the part devoted specifically for retirement and will not be used for children's education, etc.

-though I could later improve my program in this regard, there are not any spending differences from the portfolio for pre- and post- Social Security uptake.

So, they do have some limitations.  But I hope they may help give you an idea about whether you are on track for your retirement.