There is great concern that a lot of people aren’t saving enough for retirement.
Do you know how much you’ll need to have the retirement you want?
I ask people this all the time. And they look so bewildered it scares me. So I send them to choosetosave.org and its easy-to-use “Ballpark E$timate” retirement calculator. It asks 16 questions to help you arrive at your number, which will indicate if a combination of any pension, Social Security and investment savings will be enough to support your desired lifestyle.
Key to figuring how much money you need is determining what percentage of your current income it would take for you to live comfortably in retirement.
Every so often, I run my own retirement numbers. When I last used the calculator, I indicated that I wanted to replace 80 percent of what I earn now. Thankfully, I’m on track and then some. (I always like a cushion.)
But here’s the thing: You have to make a lot of assumptions to determine if you’ll be able to meet your goal.
One reader who had followed my advice to try the choosetosave.org calculator came back to me with some questions: “There are a lot of variables there that I have no idea what to enter,” the person wrote. “How can I gauge inflation, wage growth, return rates, etc.?”
Several certified financial planners, who volunteer to answer investor questions as part of an outreach of the Certified Financial Planner Board of Standards, offered some help on these topics.
Let’s start with the inflation assumption.
When working with her clients, Marguerita Cheng, a certified financial planner from Maryland, uses 3 percent. And Joseph Kelly, a CFP from Princeton, N.J., commented that “inflation has averaged 3 percent over the last 80 years and 2.5 percent over the last five years.”
One quick way to estimate inflation is to look at the cost-of-living adjustment, or COLA, used for Social Security payments, suggests Joel Redmond, a CFP from Syracuse, N.Y. He pointed out that the median COLA since 1975 has been 3.05 percent, according to data on the Social Security Administration’s website.
In 1975, the COLA was 8 percent. It was as high as 14.4 percent in 1980. Last year, it was 0.03 percent. So for long-term planning purposes, it’s probably best to use 3 percent.
As for the calculator’s wage growth assumption, be careful that you’re not too optimistic.
“When I develop a financial plan for a client, I assume a wage increase of 2 percent,” Cheng said. “I don’t want to overestimate.”
Kelly was even more conservative, saying, “Wage growth has stagnated at around 1 to 2 percent.”
The calculator will ask for your expected age of death. This question can stop you cold. How the heck can you accurately guess when you’ll die? But we do know that folks are living longer, which means there’s a chance they might outlive their savings.
“Clients and advisers often underestimate their life expectancy,” Cheng said.
The Social Security Administration has a quick life-expectancy calculator (https://www.ssa.gov/oact/population/longevity.html) that is personalized based on your gender and date of birth. If I reach 62, the calculator says I probably will live until I’m almost 87 years old.
The SSA advises that its calculator “does not take into account a wide number of factors such as current health, lifestyle and family history that could increase or decrease life expectancy.”
If you want a calculator that does factor in your health, lifestyle and family history, try www.livingto100.com.
Finally, there’s the question that really stumps people. You have to input the rates of return you assume you’ll earn on your investments before and after you retire.
“Clients, and sometimes advisers, too often overestimate returns,” Cheng said. “In the accumulation phase of retirement, I may assume an 8 percent growth rate. In the distribution phase, I may assume a 6 percent growth rate.”
Of course, the return on your investments will always vary, but Kelly says a conservative assumption model would be 1 to 3 percent; moderate, 4 to 6 percent; aggressive, 7 to 9 percent.
Now that you have help with some of the assumptions, find out your retirement number.
It’s not enough to just save. You have to know your number to be sure you’re saving enough.
Read more:
Readers may write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or michelle.singletary@washpost.com. To read more, go to http://wapo.st/michelle-singletary.
