Survey after survey shows that most Americans incorrectly think they’re comfortably set for retirement. For example, a recent retirement confidence survey by the Employee Benefit Research Institute showed that sixty-three percent of workers are very or somewhat confident of having enough money for a comfortable post-career life. But the facts—such as an average 401(k) balance of less than $100,000 across the U.S.—show us that reality is a lot bleaker and that many Americans have relatively little stashed away for retirement, and certainly not enough to give them a comfortable life down the road.
So, you have to wonder how accurate their self-assessment is. As a financial planning professional, I believe a lot of people like to hide their heads in the sand on this one. It’s like they just don’t want to think about the harsh future that lies ahead and would, on this one, rather delude themselves that they’ll be fine in retirement than face reality. I know it’s hardly pleasant to be confronted with the truth that you’re really behind on retirement savings, but I’d rather you confront this now, grieve about the mistakes you’ve made, and get onto rectifying your situation sooner rather than continuing to bury your head in the sand on this really vital issue and paying the piper down the road.
Even if you think you’re doing a good job preparing for retirement, you may be fooling yourself. So, I want you to go through this exercise with me. Let’s start with five simple ways by which you can tell whether you’re being realistic about your retirement planning efforts or simply deluding yourself and running up your risk.
- You Don’t Do Periodic Retirement Check-ups.
Saving regularly—ideally, about 15% or so of your salary every year—is the cornerstone of any retirement strategy. But factor in inflation and rising health care costs, and you’ll see that simply saving your money isn’t good enough. You also need to make your savings grow so they beat inflation and compound your capital over time and ensure that you’re actually making progress toward a secure retirement. So, if you’re someone who saves regularly, but likes the safety of banks and CDs, think again; let go of some of your risk aversion and take steps to get on a track that grows your savings over time.
Fortunately, there are lots of tools available for free on the internet that allow you to assess whether you’re making sufficient headway. Talk to your bank or go to your brokerage firm’s website and look at online retirement income calculators and make using them a quarterly or half-yearly habit, where you plug in information such as your salary, the percentage you’re saving, how your nest egg is divvied up between stocks and bonds, and the age at which you plan to retire and get an estimate of the probability of achieving your financial goal. If you find your chances are slimmer than you’d like—or that they’ve dropped from the last time you did this assessment—take action. See how saving more, investing differently, or changing your expected retirement date can improve your preparedness.
If you’re not confident that you could do this sort of evaluation on your own, you can always consult an advisor. So please do this; it’s actually quite easy, and once you do it, you’ll see that you could easily do it twice a year. But if you fail to perform this sort of exercise throughout your working life, you could find yourself closing in on your planned retirement date woefully short of the resources you need to maintain your standard of living.
- You Lack a Disciplined Investment Plan.
This one I address to a lot of do-it-yourselfers out there. Folks who like the stock market and like to manage their own finances; they want to save a buck on fees, but they truly lack investing discipline. You could be one of those folks if you are an active trader in your retirement accounts, find yourself investing in funds that have topped the performance charts lately, or you “diversify your portfolio” with new or arcane exchange-traded funds; maybe you saw an article that sounded interesting to you and you picked one of those up or try to time the market to avoid downturns and capitalize on rallies. In my experience, 99% of those who go it alone on their investments underperform the market and typically end up losing a sizable portion of their retirement savings on bad bets. And, really, there is some data in this degree, and the data basically states that between 1996 and 2015 the S&P500 was up 8% but the average investor was only up a little over 2%, and that’s not good. So be smart about that, and if you’re going to spend some money, spend it where you’re going to get some value and don’t just be pennywise and pound foolish.
You also want to make sure you have an effective approach to investing, building a diversified mix of stocks and bonds that match your appetite for risk. You might say, “Well, what is my appetite for risk? How do I know?” Well, there are several online tools that can rate your appetite for risk relative to others. You can do a google search on risk tolerance-asset allocation questionnaire, and you’ll find tools from industry leaders such as Vanguard, Charles Schwab, Fidelity and so on, that you can use for free.
On these sites, I also urge you to read up on recommended asset allocations that match your risk profile. I advise against upping your risk beyond what these sites suggest for your age, income, and savings profile. But remember, though, that their suggestions are for the average person, and none of us individually is really average, so don’t take them too literally. They are, however, a great way to get started on understanding risk versus reward.
Once you’ve evaluated your risk profile, invest as much as possible in funds with low fees, preferably index funds or ETFs, that offer broad exposure to stock and bond markets, so that less of the market’s returns go to the fund management company.
After you’ve created your retirement portfolio, resist the urge to tamper with it, even when the market is volatile. Instead, stick with the stocks-bonds blend you originally set. If you have a fair amount of money and a lot at stake, I would highly recommend that you seek out a professional. Someone who is a Fiduciary (which means he or she has to put your needs and goals first), someone who doesn’t earn commissions on what they recommend. Look for someone with years of experience and a clean long-term career.
- You Figure You Can Skimp on Saving Now by Working Longer.
Here’s another knee-jerk reaction from people who realize they’re behind on their retirement savings: “I love my work. I’m never going to retire. I’ll just keep working through retirement. Or perhaps retire later.” True, spending a few extra years on the job can significantly improve your retirement prospects by giving your nest egg more time to grow, boosting the size of your Social Security benefit, and reducing the number of years your savings have to support you. The problem is even if you want to extend your career, you may not really have that option available to you down the road. In fact, data from the Employee Benefit Research Institute shows that nearly half of retirees ended up leaving their jobs earlier than they’d planned, usually due to health problems or disabilities, downsizing or layoffs at their company, or having to care for a spouse or other family member.
So, if you’re approaching retirement age and find that your nest egg isn’t large enough to support the post-career lifestyle you’d envisioned and you’re able to work a few more years, by all means, do so. But don’t base your savings regimen on the assumption that you’ll be able to work as long as you like because if you are unable at some point, you may have no choice but to dramatically scale back your standard of living.
- You Think You Can Make Up for an Undersized Nest Egg by Working in Retirement.
Working on and off or part-time can be a good way to generate extra cash in retirement and reduce the risk of depleting your savings too soon. But that expectation may not square with reality. In fact, Employee Benefit Research Institute data show that only slightly more than a quarter of retirees have actually worked for pay after they retired. This doesn’t mean you shouldn’t seek a retirement gig by checking out sites like RetiredBrains.com if you want to bolster your retirement cash flow (or even to stay more socially engaged). But it does mean that you should make a point of saving and planning during your career so that taking on a job in retirement is something you do because you want to, not because you have no other choice.
- You Don’t Have a Plan to Turn Savings into Income.
Building an adequate nest egg during your working years is only half the job of preparing for a secure retirement. The other half is making sure the savings you’ve accumulated during your career—plus other resources such as Social Security, pensions, home equity—can sustain you through a retirement that may very well last into your 90s. And the only way to ensure you’re adequately addressing that task is by creating a comprehensive retirement income plan.
Your plan should include a retirement budget to estimate the expenses you’ll face once the paychecks stop, determining the age at which you claim Social Security, and settling on a reasonable withdrawal rate that can give you the income you’ll need without depleting your nest egg prematurely.
Ideally, you should develop that plan now, regardless of whether you’re young or imminently facing retirement because this budgeting exercise often acts as the wake-up call that spurs you into taking retirement savings seriously. Wait too long or blow off this important task entirely, and you could find yourself on the verge of retirement with no real sense of whether you’re truly prepared for your post-career life.
The bottom line is you want to get our head out of the sand if you haven’t really been doing this work. You want to think about the future now and not be caught short later in life realizing you should have made these moves five or ten years ago.