Retirement Rules Of Thumb: Good, Better, Best

Figuring out a retirement plan is no walk in the park. The variables are many and the future is unwritten. And it’s stressful.

Here’s the thing. That stress that is bothering you is not from thinking about retirement, it’s from actively not thinking about retirement.

You’ve probably met people who have their retirement plan worked out. Money never comes up. They seem at ease with any outcome in life, even big setbacks, because they know they have controlled for the controllable.

Yes, your health may change for the worse. Yes, financial calamities can hit the markets, the economy, everything. Those are the uncontrollables. It’s why we own insurance.

The controllable things are how much money you have saved and how well it’s invested for your future self. Get a good head of steam going on that and money becomes a secondary topic in life, after family and career and your interests.

Ready to get on the road to money serenity? Here are three retirement rules of thumb, good, better and best. They all work. Only the exactitude rises.

Good: Use a multiple of your income

This is a great starting point. Essentially, Fidelity Investments tells you to take your current income and multiple it by a number. Decade by decade, that multiple is the size your portfolio must become to sustain your lifestyle into retirement.

It works like this. If you make $75,000 a year:

• At 45 have saved up three times your salary ($225,000)
• At 50 make it four times your salary ($300,000)
• At 55 be at five times your salary ($375,000)
• At 60 have six times your salary ($450,000)
• At 67 have eight times your salary ($600,000)

There are caveats, but this is a good starting point.

Better: Use a simple calculator

The investment management firm BlackRock offers a free, relatively simple (to use) retirement income estimator. Just move the slider to your age, enter your savings on the next page and the calculator tells you how much income to expect.

Under the hood it’s quite complex, but not many online calculators give you as robust yet simple a tool to check your assumptions. It factors in inflation, life expectancy, interest rates, all the kinds of moving targets that it takes a financial analyst’s training to understand.

The calculator is only a tool, and the answers can change day to day, but it’s a very sophisticated way to figure out if your first number from the Fidelity rule above will hold water later on, when you need the numbers to work.

Best: Go whole hog with a Monte Carlo simulator

Financial planners love simulators. They especially love the Monte Carlo model, which runs your input data against thousands and thousands of market outcomes over decades. These are quite complex, but Vanguard has a free one that’s easy to use.

A Monte Carlo model offers a view of how often a long-term plan will “fail” based on your assumptions, that is, in how many cases would your plan run out of money before a specific retirement age.

Lower is better. Having a plan that fails in 1% of market scenarios over history is much better than one that fails 10% of the time, or 40% of the time.

Get on the path to retirement serenity. The first leg of your journey might be trying, but the views from higher ground are fantastic.