margin of safety by plugging very low
returns into your retirement calcula-
tors. Colorado Springs financial plan-
ner Allan Roth assumes a zero percent
return after taxes and inflation. “That
probably lowballs what a good inves-
tor could earn,” he says. “But for most
people, who have a lot of their return
eaten away by fees and bad decision
making, a return that equals inflation
might even be a little optimistic.”
Other planners and calculators
don’t even ask you to guess at your in-
vestments’ long-term return. Instead,
they rely on what’s known as Monte
Carlo analysis, which runs thousands
of investment simulations based on
past market performance. The aim
isn’t a down-to-the-dollar projection
of your nest egg in 20 years, but to
find the probability that you’ll have
the income you want. Most planners
say a plan is on track if Monte Carlo
analysis gives you an 80 or 90 percent
chance of maintaining the income you
want for as long as you expect to live.
But, to paraphrase the old military
adage, no retirement plan survives
contact with market reality. To stay
on track, you must monitor your plan
regularly and adjust to any curveballs
the markets throw by saving more or
working longer or recalibrating your
desired retirement income. (More on
that under the next question.) One
thing you can count on: The markets
will throw curves.
How much
income will
you need?
Now you’re ready to adjust your plan
based on shifting market realities.
But what, exactly, are you supposed
to adjust? It’s not as though you can
decide to live longer or choose what
your investments will return. There is,
however, one big question over which
you do have some power, says Alicia
Munnell, Ph.D., director of the Boston
College Center for Retirement Research:
how much income you will need to
be comfortable. Obviously, you don’t
know the precise answer, because you
3
can’t forecast wild cards such as future
inflation rates, tax rates, or health care
costs. (Although you should prepare
to spend more than you may think:
Fidelity Investments projects that the
average married couple will need to
set aside $230,000 by age 65 to cover
out-of-pocket health care costs in
retirement.) Still, you can manage
your retirement’s price tag by choosing
how much you save each month and
when you will retire, and by thinking
carefully about the retirement lifestyle
you envision.
The benefit of saving more each
month is obvious. If markets perform
well, a dollar saved today could grow
to two dollars or five dollars at retirement. Even if the markets produce
one lost decade after another between
now and your retirement, a dollar
saved is still a dollar you wouldn’t
otherwise have in the future. That’s
why planners who once advised saving 10 percent of your salary now recommend 15 percent. It’s all about the
margin of safety.
There’s a less obvious benefit to
regular saving, says Munnell. We are
creatures of habit, and if you make a
habit of saving, you’ll be a more modest spender. It could be as painless as
increasing your 401(k) contribution
by a percentage point or two every
year until you hit 15 percent. However
you do it, you’re training yourself to
get by on less—now and in retirement.
Good health and employer willing,
you can also choose when to retire.
“Retiring later is a very powerful
lever,” says Munnell. “It completely
changes the arithmetic.” How?
; It raises your monthly Social Security benefits. The maximum benefit at
62, for instance, is a tad over $1,800 a
month. If you hold off claiming Social
Security until age 70, your monthly
benefit jumps about 75 percent, to
almost $3,200. And because Social
Security is one of the few sources of
retirement income that rises with
inflation, starting off with the greatest
benefit you can get is truly the gift that
keeps on giving.
; It allows your retirement savings
to accumulate for more years, possibly helping you regain lost ground.
; It shaves the number of years you’ll
need to live off your savings. After all,
just because you work longer doesn’t
guarantee you’ll live longer.
Finally, you can choose to live
on less income than you may have
initially aimed for. Planners often assume you’ll need a retirement income
equal to 70 to 80 percent of your salary
to maintain your pre-retirement standard of living. You don’t want to condemn your older self to destitution,
but Get a Life author Warner believes
you can live with less if you adopt the
right perspective.
Warner came to this comforting
conclusion after talking with hundreds of retirees. He cites a character
in his book, a golf enthusiast named
Howard who beats greens fees by
volunteering as a country club course
marshal in exchange for free golf.
Another retiree, Ed, gave much of his
savings away when he retired. Why?
He thought his kids needed it more,
and his hobby—archaeology—didn’t
cost much. Now in his late 70s, Ed describes himself as “a penniless desert
rat,” living frugally but happily near
an archaeological dig in New Mexico.
The point is that the real answer
to the “how much you’ll need” question may include less money than you
think and more of the things that are
hard to count. Sure, aim high in your
financial plan, says Warner, but don’t
forget that strong relationships with
friends and family, hobbies that allow you to make the world better, and
activities that keep you moving and
learning will contribute more to your
happiness than a pot of gold. “If you
look back at your 20s or 30s and consider the most important things that
happened to you, it would be a long
time before you got around to talking
about how much money you made,”
he says. “Why should that be different
when you’re in your 70s or 80s? You’ll
do much better planning for retirement if you recognize that it’s not all
about money.” ;
Kathy Kristof is a financial journalist and
the author of Investing 101.
