Your retirement plan: Will it work?

One of the most common questions we get is, “How much money will I need for retirement?” This is a difficult question to answer because calculating your retirement needs involves making assumptions about the return you’ll earn on your portfolio. Typically, rates of return are based on historical average returns for various types of investments. It’s also necessary to estimate how long you’ll need income after you retire. Whether you are on track to meet your goals depends in part on the accuracy of all these assumptions.

Question your assumptions
It might be time to revisit your retirement calculations. “Past performance is no guarantee of future results” has always been true, but we usually begun our questioning by deciding whether stocks will match the returns they have had in the past. It’s not unusual to see forecasts for long-term stock returns that are 3 percentage points lower than the 8% to 10% figure often used to plan portfolios. That may not sound like much, but even a 1% difference can be very costly over time. For example, getting a 4% real return on $100,000 over 20 years would earn you roughly $50,000 less than a 5% return.

Review your asset allocation
If returns for each asset class in your portfolio turn out to be lower than you’ve projected, you may need more in your retirement kitty to give you the income you’ve been planning on after retirement. To try to increase the nest egg available to you at retirement, you may want to reconsider your overall asset allocation.

Remember, diversification doesn’t ensure a profit or guarantee against a loss; what it does do is give you more options for balancing risk and potential rewards.

Consider your income needs projections
People are living longer than they used to, which means your nest egg might also need to last longer. Decide if your spending estimates for retirement are realistic. Reducing the annual percentage of your savings you plan to withdraw to use as income after you retire will increase your nest egg’s longevity. (However, remember that if your savings are in a traditional IRA or employer-sponsored retirement plan, you’ll be required to take minimum distributions each year once you turn 70.)

Another way to address your projected income needs is to consider investments that can provide a lifetime income stream.

Pay attention to expenses and taxes
If investment returns sag, costs and taxes will have greater impact. Pay attention to the tax efficiency of your investments as well as their returns. If you actively trade stocks, be aware of trading costs. With mutual funds, understand the breakpoints that can help minimize sales charges the more you invest; also, check out a fund’s expense ratios and fees.

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