Money, Health, and Other Things

Educational Blog in the Area of Family and Consumer Sciences for the Middle Peninsula


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[Replay] Planning for Retirement, Part V

Over the next few weeks, we’ll revisit our series on retirement planning! This week, we’ll return and discuss estimating how much you need to save for retirement.

While many households need 70% to sometimes more than 100% of pre-retirement income during retirement, social security often only provides 25% to no more than 50% of needed retirement income. This creates the need for the majority of households to save a considerable amount of money for retirement. Which begs the question, “am I saving enough?” To answer that larger question, you need to answer some more specific questions.

First, look at where your current and future retirement savings are being invested. Are they being invested in a manner that helps those savings grow, without being too risky for your personal risk tolerance?

The historical average annual return of a 100% equity/stock investment, with diversified investments similar to the S&P 500, is around 10%. However, that comes with significant variation. Historically that 10% average includes years with more than 50% gains, and some years with more than 40% losses. While we would all appreciate higher growth, many people saving for retirement, especially those only a few years away from retirement, cannot afford a 40% loss in retirement savings. To reduce that risk, you could save money in an investment with more high-quality bonds, and fewer stocks, with the tradeoff being a lower average annual growth. Many investors invest at a high risk when they’re younger, at a time where they can take advantage of higher average growth, with many years to recover from a down market, and invest more conservatively as they age, to avoid significant losses. One common rule of thumb for asset allocation, which is the percentage of investment in stocks/equity vs. bonds and other fixed incomes, involves taking the number 100, subtracting your age, and using that as the target percentage of stocks in your retirement investments. More aggressive investors may use 120 minus age. If you find that your retirement savings are well off your desired asset allocation, you may need to adjust your retirement portfolio. Keep in mind, there may be a cost to adjusting your portfolio if you need to sell and buy new investments. If you take this approach, you may want to make changes primary through adjusting future retirement savings, for instance, focusing on purchasing more bonds or bond funds if your portfolio has too high a percentage of stocks, and/or avoid adjusting your portfolio unless you’re at least 5-10% off of your goal.

We’ll return next time to continue our discussion on estimating how much you need to save for retirement.