Broker Check

Are You On Track for Retirement?

| April 02, 2017
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One of the most frequent questions I get is “Am I On Track For Retirement?”


While there is no substitute for a personalized financial plan customized to your exact situation, this handy chart from JP Morgan provides a rough estimate based on your age and pre-retirement income.


To use this chart match your age with your household income. For example, a household with a 50 year old couple making $100,000 annually shows a factor of 4.5.  This means that the household should have $100,000 x 4.5 = $450,000 saved to be on track for retirement at age 65. 




There are several important assumptions used in this model. 


First is that your investment return pre-retirement is 6.5% annually on average and 5.0% per year post retirement.  This return assumption is based on JP Morgan’s proprietary long term capital market assumptions over the next 10-15 years.  There is no guarantee that we will see long term investment returns assumed in the model.  Actual returns will depend on your portfolio and could be higher or lower than the assumption.


The next important assumption is that retirement occurs at age 65 and that Social Security is taken at age 65 for the primary earner and 62 for the spouse.  Beginning your Social Security benefit earlier provides a lower income and beginning it later provides a higher income.  This leads me to the importance of a financial plan that can help you determine how to optimize your Social Security benefits.  It should be noted that when one spouse dies, the survivor keeps the higher of the two Social Security Benefits.  This means a reduction in Social Security income because of the loss of the lower benefit.  Further, the surviving spouse then files a tax return under a single filing status, where tax rates can be higher for similar taxable income levels than married filing jointly.


The next assumption is that retirement lasts for 30 years. This means at least one of the retirees lives to age 95.


Inflation is an assumed 2.25%.  This is a little higher than recent inflation figures but lower than the 50 year average.  Although market risk is often one of the biggest worries for clients, inflation risk could pose an equal if not higher risk.


Note that the confidence level assumed in the table is 80%.  This means that under thousands of random market simulations, having the target amount saved worked in 80% of those random market simulations.  An 80% confidence level is good, but it does leave a 20% possibility that we see really crummy market returns in the coming decades and this would mean more money must be saved to have a successful retirement where you do not run out of money.


Finally, the model assumes that the household is contributing 5% of annual income towards retirement.  If you are contributing more than 5% including your employer match, the amount you need to have saved is actually lower than depicted in the chart.  However, if you are saving less than 5% including employer match, you will need to have more than the target amount in the matrix.


So hopefully this is a helpful chart to determine if you are on track for retirement. However, a personalized financial plan will help you determine if you are on track with a greater degree of accuracy given your specific portfolio, your Social Security strategy, and your current contribution rate.  Please contact me if you are interested in starting a financial plan, or updating the plan you have.


Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not an indication or guarantee of future results



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