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Post #9 – Retirement Savings – Staying on Track

I thought it might be helpful to provide one more post on retirement savings before moving on to investment concepts and strategies. In Post #7 I provided a simple 4-step process on how to estimate the size of your future retirement nest egg. In Post #8 I included a table for determining what your annual savings rate should be. Over time it is important that you track your progress towards your retirement goals. The following simple table will help gauge how well your retirement savings is on track.

The table in this post is contained in Ben Stein and Phil Demuth’s 2005 book Yes, You Can Still Retire Comfortably!: The Baby-Boom Retirement Crisis and How to Beat It. It is a companion table to the one I provided in Post #8 regarding the recommended annual savings rate. The table provides an estimate of what your total savings should be, based on your age, as a multiple of your annual income. The figures are based on the same assumptions as the savings rate table provided in Post #8. Again, the major assumptions are for a conservative, well balanced portfolio, 1% total annual investment expenses; a cost of living based on 80% of your final year of earned income, retirement at age 70, and no employer provided pension.

*Table reproduced with permission from Phil Demuth

To use this table you sum up all your funds dedicated to retirement; that is, do not include emergency funds, college savings accounts, house down payments, etc. Also, do not include the value of your home equity. The only step in using this table is you divide your current total dedicated retirement savings by your annual income. This calculation will determine your retirement savings multiple in relation to your annual income. Once you have this figure, you look down the left hand “Age” column to your current age (or closest to your age) and move across to find the recommended “Retirement Savings Multiple.” You compare your actual retirement savings multiple to the recommended multiple in the table. Remember, this table is based on retiring at age 70. If you want to retire at age 65, you must add 5 years to your current age when using the table.

If your calculated retirement savings multiple is significantly lower than the recommended multiple for your age in the above table, you might consider increasing your savings rate regardless of what the savings rate table in Post #8 suggests is appropriate. Asset returns can vary and counting on higher future market returns is betting on future prospects in which you have no control. But you do have control over your savings rate. A common mistake that savers make is to assume market returns that are higher than what is likely to occur in order to justify a lower savings rate. This is gambling with your retirement. I would recommend saving more and assuming lower average market returns. If the market returns happen to be higher than your assumptions, you will have a larger retirement nest egg. I have yet to meet the retired person who, after having made the sacrifice, was not happy with the trade off of having given up spending gratification at an earlier age for a much larger nest egg in retirement. But I often meet people in their 50s and 60s who lament not having saved more when they were younger.

I have twice made reference to Ben Stein’s and Phil Demuth’s book Yes, You Can Still Retire Comfortably!: The Baby-Boom Retirement Crisis and How to Beat It. For anyone who is interested in delving further into the subject areas covered in these last few blog posts, this book will provide  more detail. In addition, the book covers many other important areas that I will provide my own thoughts on in future blog posts, such as how to invest your assets, how to create retirement income, and different ways to draw down your assets in retirement. The book also discusses what steps you might consider taking if, when retirement arrives, your retirement savings is not quite at the point you would like it. It is a simple, straight forward, easy to understand book on retirement planning basics and it is written in a style that keeps the subject interesting.

The last major area of retirement planning is how to invest your retirement savings in a manner that will provide sufficient returns while, at the same time, protecting your assets from severe market down turns. There are a few basic investment concepts that need to be understood. But the long term investment strategy that I will outline is simple to implement. Investment concepts and strategies will be the topic for the next few blog posts.

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