*Let’s examine what you can do if you’re disappointed with your progress*

This is the final post of a set of four, on the subject of projections of the replacement income that your retirement savings can sustainably generate. And the title says it all. Let’s see what your options are, if you’re unhappy with the numbers that reflect your current situation.

You’ll remember that the first post showed how to go beyond just looking backward, at how much your accumulated value fell in 2022. Instead, you realized that even that depleted value is likely to replace a much higher proportion of your current pay after you retire, than the projection of a year earlier. Why? Because, as the second post showed, the depletion is projected to be substantially overcome by the higher interest rates that the current environment brings. And then the third post showed that, if (unlike the traditional projections) you project ongoing inflation after retirement, the sustainable “real” (that is, adjusted for inflation) lifetime income stream after retirement is (of course) lower than the constant-nominal-dollar income stream.

So: surprisingly good news in the first post, an explanation in the second post, but reality strikes in the third.

***

Let’s compare the numbers in the second and third posts, for our hypothetical worker. The numbers are purely illustrative, but we can still draw some conclusions.

You’ll remember that, at the end of 2022, the worker is 45 years old, and started saving at age 30, saving 10% of pay for each of the last 15 years (that combines the worker’s and the employer’s contributions together). If the then-current financial scene remains unchanged in the future (the standard assumption for such projections), meaning that the stocks are sold and the proceeds reinvested in bonds, and interest rates stay unchanged, the projection for retirement at age 66 is that the 15-year accumulation will support an annual lifetime income of 31% of current pay (assumed to continue at that level while the worker and partner are both alive, and reducing by half after the first death).

The worker compared this to the father’s “gold standard” defined benefit plan, which after 15 years of contributions would have created an entitlement to a lifetime income stream at 30% of current pay. In the same ball park.

(Also remember: this was much better than the previous year-end’s projection, which showed sustainability at only 18% of then-current pay – much lower than the father’s “gold standard” entitlement of 28% of then-current pay.)

The worker then asked for a projection that also takes into account inflation after retirement, at a rate equal to the difference between the nominal and real yields embedded in 10-year US Treasuries and TIPS. (In essence, this is the anticipated inflation tolerable by those who are willing to put their money where their mouth is.)

And now the 31% sustainable lifetime income falls to 25%. The previous year’s projection would have been 14%.

Our hypothetical worker has two feelings. First: yes, I’m grateful for the big improvement over the previous year, but let’s not rely on that sort of big improvement happening again. It’ll only happen if interest rates rise again, which is a scary prospect. So my 31%-nominal or 25%-real projection is a pretty good starting point for looking at the future. Second: even after that big improvement, in real terms it still hasn’t caught up with the gold standard 30%. Yes, it’s true that the gold standard 30% was fixed in nominal dollars, and would be reduced by future inflation. But I’m a safety-first person, and in my mind the true gold standard, the standard I want to achieve for myself, is 30% in real terms.

And I’m not there. I’m only at 25%. What should I do?

***

As the author of these blog posts, I congratulate the worker on getting to the current position, which I’m guessing is far ahead of most workers. And I also congratulate the worker on thinking about the future now, at age 45, rather than suddenly realizing at retirement that it’s too late to take action. But my congratulations won’t change anything for this cautious person. I need to make practical suggestions.

I have four. I hope the first one solves the problem and brings peace of mind. If it doesn’t, all of the other three are likely to bring some stress to the worker’s mind. (I’m sorry, but that’s the way it is.)

Here’s the first. Maybe your goal is unnecessarily ambitious. Maybe you don’t need that gold standard years-of-contribution-multiplied-by-2% that’s in your mind, because of the coincidental but irrelevant fact that that’s what your father’s defined benefit plan promised. (And hey, remember that those plans have proved to be too expensive for most employers to sustain.) Instead, estimate the income required to sustain your genuine future desired lifestyle. What I’m implying is that this may well be much less than the 72% that your gold standard (36 years of contributions to age 66, multiplied by 2%) suggests.

You say you have no idea what you’ll want to spend money on after you retire (or, as I prefer to think about it, after you graduate from full-time work). Fair enough, it’s too far into the future to know about that. So, make the same assumption as in the financial projections: that nothing will change between now and then. So you’ll need 100% of your current pay, right? Almost certainly wrong, by a long way. Why? Because, for most people, 100% of current pay doesn’t reflect their current standard of living. Much of current pay may go for things that will cease before retirement: perhaps mortgage payments, perhaps the next generation’s education, even those retirement plan contributions – and maybe other things.

Remove those (whatever they are, in your case) and it’s only the remainder that supports your current lifestyle. Even if there’s no post-graduation lifestyle change, it’s all you’ll require. See how much less than 100% that amounts to. In some countries there’s also some tax reduction after some “senior” age. Take that into account too.

And then estimate your “universal” pension (Social Security, Canada Pension Plan, the Age Pension, the state pension, whatever it’s called). That too reduces the amount that your own retirement savings have to support.

Maybe that’s now below (perhaps even substantially below) your mental gold standard. Whatever. This becomes your new target.

If that solves your problem, I’m so glad to have put this idea and method of estimation into your mind.

If it hasn’t yet solved the problem, there’s another way in which this way of thinking can help. Remember all those outgoings that will stop at or before retirement? Well, they have another positive impact. When they stop, those amounts then become available (without affecting your lifestyle) for adding to your retirement savings, which can then automatically increase with no sacrifice on your part. Yes, it’s much more complicated if you want to take future retirement savings into account in making your projections, but it’s definitely doable. There are many financial planners who can help you with these projections, and also several calculators if you prefer to attempt them yourself, including the one on my website.

Now, suppose you still fall short. Then you have to change something. What?

There are three things you can change.

One reduces the amount you need your savings to support. Typically this comes from retiring later, so that there are fewer years of support needed. As I said before, probably a stressful thought. The calculator helps you try different retirement ages to see which one comes nearest to projecting achievement of your goal. (Actual achievement, of course, depends on how the future turns out, for which you can only input assumptions at this early stage.) Retiring later actually helps in two ways: not only do you need spending money for fewer years; you also save for longer. This solution tends to have the most dramatic impact on those projections.

Another way to reduce the amount you need your savings to support is to work part-time after retirement. Think of it as a partial variation on retiring later.

The second thing you can change is to increase your retirement contributions each year. This will lower your current standard of living, at least to some extent. It’s a struggle between your present self and your future self, and it’s that future self for whom you’re trying to generate post-retirement paychecks.

By the way, before you do something nice for your future self, remember that you need to live securely not only in the future but also in the present. And by this I mean that, even before you save for your future self, make sure that your present self has an emergency fund.

The third thing you can change is your investment approach. You can attempt to increase the investment return on your savings by taking more risk. I mention this as something you can do, but it’s actually very dangerous because, even if you hope for success and (based on the past) expect success to come your way in the long term, success is by no means guaranteed. It also increases the volatility of your results and your projections, and (if you’re truly the safety-first person you proclaim yourself to be) that’s the last thing you want to deal with. Indeed, the customary approach to investment policy as one gets closer to retirement is to *reduce* risk, because the amounts at risk are increasingly large (so, in dollar terms, the risk gets bigger every year) and you have less time in which to take action to restore a lost position. That’s why the glide path approach (or, as it may be called, the target date approach or the life cycle approach) is adopted as a default option in so many plans.

***

**Takeaway**

*If you’re disappointed with your projections of the sustainability of your current income after retirement, the first thing to do is to see how much (really, how little) of your current paycheck reflects your actual lifestyle. Typically this reduces your target, compared with rules of thumb that we tend to use. If you’re still disappointed with your progress, you can plan to postpone retirement, or increase your retirement contributions now, or (dangerous!) increase the riskiness of your asset portfolio.*

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I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.