Q. I save 15% of my salary each year in my 401(k), my company matches another 4.5% and I contribute the max to a Roth IRA. Am I doing enough to safely retire? -- Dave K., Jacksonville Beach, Fla.
A. If you continue at the rate you're saving, it's hard to imagine you'll come up short at retirement time. After all, you're socking away money at more than double the rate of most 401(k) participants, plus you're funding that Roth IRA.
But as important as diligent saving is, your savings rate alone can't tell you whether you're on track for a secure retirement. To know for sure, you've got to undertake a more comprehensive review of your retirement planning efforts.
You can do that by performing what I call my annual New Year's Retirement-Planning Checkup. It consists of just three simple steps:
1. Figure the odds. There are so many unknowns and potential detours along the road to retirement -- market setbacks, spates of unemployment, emergencies that drain savings -- that you can never say that a secure retirement is a given.
But by taking a look at where you stand now as well as the strategy you're currently employing,you can get an estimate of the probability that you'll be able to maintain an acceptable standard of living once you retire.
The easiest way to do such an assessment is to go to a robust online tool like our Retirement Planner or T. Rowe Price's Retirement Income Calculator. You just plug in such information as how much you've already got tucked away in retirement accounts, the percentage of salary you're saving now, how those savings are invested and the age at which you intend to retire, and you'll get an immediate forecast of your chances of being able to retire on, say, 75% of your pre-retirement salary.
Aside from the obvious benefit of letting you know whether the path you're on has a decent chance of leading to a comfy post-career life, this sort of evaluation has another advantage: by changing a few variables -- your savings rate, how you invest, the age at which you retire, whether you work part-time in retirement -- you can see how you might be able to increase your shot at a secure retirement.
This type of exercise is essential if you really want to know whether you're making progress toward retirement. If you don't feel confident doing this sort of number crunching on your own, then consider hiring a pro to guide you through the process. Just be sure to vet that adviser carefully.
2. Evaluate your portfolio. Although I've long noted that diligent saving is more crucial to retirement success than savvy investing, you nonetheless want to be sure you're not undermining your savings effort with an inferior investment strategy.
Your first task on the investingfront is to makesure you've got a mix of stocks and bonds that's appropriate given your age and risk tolerance.
Generally, the younger you are, the more of your retirement savings you'll want to invest in stocks. As retirement nears and preserving your nest egg becomes a bigger priority than growing it, you'll want to shift more toward bonds. There's no single stocks-bonds blend that's right for everyone.
As a starting point, you can check out the mix for a target-date retirement fund designed for someone your age. You can then see how such a blend might actually perform by going to Morningstar's Asset Allocator tool. If you find that the mix you're considering is too aggressive or too conservative, you can then adjust it.
You also want to be sure that your respective stock and bond holdings are properly diversified. In the case of stocks, for example, that means owning shares of both large and small companies as well as a broad range of industries. To gauge whether your portfolio is reasonably balanced compared with market benchmarks, plug your holdings into Morningstar's Portfolio X-Ray tool.
Finally, take a hard look at what you're shelling out in annual expenses.
Reducing the portion of your return that's siphoned off by investment costs can have a big payoff. Lowering expenses from, say, 1.5% a year to 0.5% can increase the eventual size of your nest egg by roughly 20%. Fortunately, federal rules that went into effect in August make it much easier for 401(k) participants to see what they're actually paying in fees and thus home in on the low-cost options in their plan's investment roster.
3. Schedule updates. Once you've completed this checkup, you don't need to fiddle with your retirement strategy every waking moment. Still, it is a good idea to check in occasionally just to be sure the plan you've put in place is working as expected.
So take a moment now to schedule a few specific times during the coming year -- the end of a quarter, a birthday, wedding anniversary, whatever -- when you can do quick re-assessment of where you stand and make tweaks if needed.
If you experience a significant change in your circumstances -- say, moving to a new job or taking on a big new financial commitment -- then you may very well want to perform a full-blown review.
Bottom line: There's no way to eliminate uncertainty when it comes to retirement planning. But if you combine this sort of annual checkup with periodic monitoring throughout the year, you'll dramatically improve your chances of getting, and staying, on the path to a secure retirement.