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In the last two weeks, you came up with your retirement goals and explored what sources of income you could expect in retirement. This week, we’ll run the numbers to see if you’re on target to meet your retirement goals, or if you’re going to need to make some mid-course changes to get you where you want to go.
But don’t worry, running the numbers doesn’t mean scratching out a bunch of complicated formulas on a pad of paper. You can easily plug your numbers into our Retirement Planner tool to see if you’re on course. I’ve created a couple of sample scenarios below that will show you how it’s done. Then it’s your turn.
Generation X
If you're a Gen Xer, this scenario might sound familiar: you're a single renter who’s contributed regularly to a 401k plan for a few years and have a modest stock portfolio. You may have outstanding school loans and wonder if it makes sense to pay them off sooner. (Quick tip: While the right answer can change depending upon the interest rate being charged and the rate of return from retirement investments, the long-term right answer is usually to continue making those retirement contributions and other investments.) The most important factor for building a retirement kitty is often starting early enough and continuing to make regular contributions.
Here's how these numbers look for Jeremy, a 29-year-old single man living in California (state tax rates vary by state) looking to retire at age 60. He has $15,000 put away in a 401k, $2,000 in a Roth IRA and $4,000 in outside investments and he’s planning to make annual contributions of 6% of salary to the 401k and $1,000 per year to the Roth IRA:
| Age | 29 (born in 1971) |
| Desired retirement age | 60 |
| Life expectancy | 80 |
| Salary | $50,000 |
| Annual increase | 3% |
| Estimate of post-retirement expenses in today's dollars (80% of current income) | $40,000 |
| Inflation rate | 3% per year |
| Current 401k account balance | $15,000 |
| Employee contribution %/year | 6% |
| Employer matching contribution %/year | 3% |
| Current Roth IRA account balance | $2,000 |
| Annual Roth IRA contribution | $1,000 |
| Taxable (non-retirement) savings and investments | $4,000 |
| Annual increase to taxable savings and investments | $0 |
| Social Security benefits starting at age 62 | $11,066 |
| Pre-retirement annual rate of return | 10% |
| Post-retirement annual rate of return | 8% |
When you run the numbers through the Retirement Planner, the result is that Jeremy is on track to retire at age 60! Jeremy is saving 11% per year: $4,000 per year or 8% of income between 401k ($3,000) and Roth IRA ($1,000) contributions) plus $1,500 from his employer’s 3% per year matching contributions.
If you’ve plugged in Jeremy's information, you can now play “What if?” at the last screen and vary the possibilities. For example, changing the retirement age to 55 or even 59 will have a different result for him—retirement won’t be possible before age 60 without boosting contributions. You can pick the desired retirement age and the Solve function will calculate how much to contribute each year to meet that retirement age goal. With the Solve function, you can also see which variable is the most palatable to change (such as increasing your savings rate or increasing your retirement age or a little of each).
Baby Boomers
If you’re a baby boomer in your late 30s or early 40s you probably have a variety of retirement funds and personal investments but don’t have a consistent savings/investment plan. Often boomers deal with multiple financial priorities, all fighting to utilize the same dollars. It can be tough saving for retirement while at the same time paying a large mortgage and saving or paying for one or more children’s college education. In the following example, we see a couple in their 40s trying to reconcile these priorities.
Jim and Jessica, a California couple, have $85,000 and $30,000 respectively in their 401k’s, a total of $22,500 in traditional IRAs ($16,000 and $6,500), $4,500 in a Roth IRA and $45,000 in outside investments. They’re planning to save 4% and 2% respectively of their salary in their 401k’s and $2,000 per year for outside investments. They are not planning to contribute to their IRAs. Here’s how their numbers work out:
| Age | 41 and 40 (born in 1960 and 1961) |
| Desired retirement age | 62 |
| Life expectancy | 81 and 84 |
| Salary | $65,000 and $45,000 |
| Annual increase | 3% |
| Estimate of post-retirement expenses in today's dollars (80% of current income) | $88,000 |
| Inflation rate | 3% per year |
| Current 401k account balance | $85,000 and $30,000 |
| Employee contribution %/year | 4% and 2% |
| Employer matching contribution %/year | 2% and 1% |
| Traditional IRA | $16,000 and $6,500 |
| Annual Traditional IRA contribution | $0 |
| Current Roth IRA account balance | $4,500 and $0 |
| Annual Roth IRA contribution | $0 |
| Taxable (non-retirement) savings and investments | $45,000 |
| Annual increase to taxable savings and investments | $2,000 |
| Social Security benefits starting at age 62 | $11,066 and 8,549 |
| Pre-retirement annual rate of return | 10% |
| Post-retirement annual rate of return | 8% |
With these numbers, they will run out of money with eight years left to live. Something has to give. They’ll need to start saving more and/or delay their retirement age. Since it’s clear their current plan is an invitation to disaster, this is the time to make a course correction using the Solve function.
Ready to retire soon
Finally, if you’re in your late 50s and early 60s and have been conscientious about saving for retirement, the road to a comfortable retirement will become a reality. With a scenario like the following, our couple is on target and should make their goal easily.
Julie and Jordan are a married California couple in their 50s with healthy 401k balances (a total of $575,000), traditional IRAs (totaling $72,500), Roth IRAs adding up to $14,000 and outside investments of $300,000. They’re still saving with each of them making 6% 401k contributions, $2,000 Roth IRA contributions and adding $15,000 per year together to their outside investments. They want to retire at ages 62 and 60 respectively and it looks like they're right on course.
| Ages | 57 and 55 (born in 1943 and 1945) |
| Desired retirement age | 60 |
| Life expectancy | 82 and 85 |
| Salary | $70,000 and $35,000 |
| Annual increase | 3% |
| Estimate of post-retirement expenses in today's dollars (80% of current income) | $84,000 |
| Inflation rate | 3% per year |
| Current 401k account balance | $450,000 and $125,000 |
| Employee contribution %/year | 6% and 6% |
| Employer matching contribution %/year | 3% and 3% |
| Traditional IRA | $50,000 and $22,500 |
| Annual Traditional IRA contribution | $0 |
| Current Roth IRA account balance | $7,000 and $7,000 |
| Annual Roth IRA contribution | $2,000 and $2,000 |
| Taxable (non-retirement) savings and investments | $300,000 |
| Annual increase to taxable savings and investments | $15,000 |
| Social Security benefits starting at age 62 | $11,857 and $9,159 |
| Pre-retirement annual rate of return | 10% |
| Post-retirement annual rate of return | 8% |
Now It's Your Turn
Gather all of your numbers for your personal investments, retirement plans, and estimated Social Security benefit and take a test drive on your retirement future by plugging them into the Retirement Planner. Play around with the Solve function to see what you can change to ensure that you can meet your retirement goals.
Next week
Once you determine how much you need to save each year, you’ve got to find the right investments. We’ll discuss that in next week’s column.
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