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You might not have much choice, though.
Most likely, Social Security and your pension or retirement plan will only partially subsidize your dreams. According to a Congressional Budget Office report
, the average worker who retired at age 65 in 2008 will receive a benefit amounting only to about 40% of his preretirement earnings. Pensions or employer-sponsored retirement plans don't always cover the rest. Your own savings will more than likely make the difference between a retirement of jet-setting and one of sweater knitting.
So, in addition to monitoring your retirement portfolio and rebalancing as necessary, you should also calculate whether that portfolio is returning what it needs to be returning for your dream retirement. Here's how to do just that.What Will Your Income Be?
The first step is determining what your regular retirement income will be, excluding your income from your own savings.
Request a Personal Earnings and Benefit Estimate Statement from the Social Security Administration (call 800-772-1213 or visit www.ssa.gov
) to find out what you can expect each month from Social Security. Some people already receive this yearly, but if you haven't seen it yet, submit the form (which you can download or request over the phone), and the Social Security Administration will send you a list of estimated benefits, including your monthly retirement check in today's dollars. (Remember that Social Security benefits rise with inflation.)
If your Social Security benefits seem too skimpy, they may be. Not reporting name changes, using a name other than the one on your Social Security card, or entering an incorrect Social Security number can lead to inaccurate benefits calculations. Troubleshoot by checking your benefits every few years.
Projecting what your retirement or pension plan will provide requires more legwork.
First, know the factors behind your expected future payments. Defined-benefit plans, such as a pension, often are linked to Social Security payments; consequently, a fatter Social Security benefit could mean a slimmer pension check.
Second, be persistent about seeking information. Some plans will update you regularly about your benefits as you near retirement. Others aren't as accommodating. Pester your employer's human-resources department for more information. If you get the run-around, turn to Washington. Call the Employee Benefits Security Administration (800-998-7542) to find the Department of Labor office in your area. Also take a look at the Department of Labor's free Protect Your Pension pamphlet
Finally, don't overlook those pensions owed you from brief employment stints or from companies that have merged out of existence or gone belly up. Check the Pension Search Directory
online to discover whether you're one of the thousands of people who haven't claimed forgotten pensions.How Much More You'll Need
Compare your expected pension and Social Security income with the amount of income you think you'll need. Determine whether or not your current investments will cover the difference between the two figures. Remember that you probably won't need the entire lump sum of your retirement costs the minute you retire. More than likely, your investments will continue to grow during your retirement.
Many Web-based programs demand a major assumption: the return you expect from your investments. Since 1926, large-company stocks typically have returned about 11% per year, according to Ibbotson Associates' Stocks, Bonds, Bills, and Inflation
. Investors retiring in 10 years or sooner should assume an even lower return--perhaps 6%-7% per year. It's always better to use conservative projections and be surprised on the upside.
Intermediate-term bonds have returned about 5% per year, on average, a fair return to use for your bond positions. (If you want to be conservative, factor in a 4% return.) For cash, we recommend using a conservative 2% return.Making It All Add Up
If your current portfolio isn't generating the type of return you'll need for your retirement, consider the following.
- Rethink your retirement lifestyle. Separate your needs from your wants. One way to save big: Lower your housing costs. Moving from a $300,000 home to a $200,000 home not only means more cash in your pocket but probably lower upkeep expenses too.
- If retirement is far enough away, get more aggressive. Trade some of your bond funds for conservative equity funds, or swap in more growth-stock exposure.
- Put off retirement, or work part-time. People of full retirement age (65-67 depending on when you were born) can receive their full Social Security benefits, no matter what their earnings are. Even if you begin receiving Social Security before reaching full retirement age, you can earn up to a certain amount and still receive full benefits.
- Save more now so you can spend more later. This is hard. It's also common sense. Americans have historically had shockingly low savings rates, shockingly high debt, and an alarming tendency to overspend--though recent trends suggest a long-needed frugality may be setting in following a rough 2008.
- Don't forget to reevaluate your situation every three to five years.
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