Opinion: Reset your retirement calculator now for today’s darker stock markets and make sure you’re still on track

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When the markets are down, you don’t want to look at your 401(k) statement. But with a potential “lost decade” of stock market returns looming, you need to at least take a look, because it’s time to realize your ability to afford retirement.

Economists often point to the fact that stock markets always eventually go up, but there are times when returns are down or flat. These periods can last for a while, even a decade, as they did from 2000 to 2013.

Your assumptions may be woefully inadequate if the numbers you used to determine how much you might need are more than six months old. Even if it hurts, you should jump online and run the numbers again using a calculator – or consult a financial professional.

3 key figures to update

Most people save for retirement by first calculating a large round amount they’ll need, like $1 million, and then working backwards to see how much to save today to get there. This involves some key information. On the one hand, there are the big intangibles unique to you, like when you’ll retire, how long you’ll live, and how much you’ll spend. Then there are the factors you can’t control: how much your investments will grow, what the rate of inflation is, and how much Social Security will pay.

If you are using a retirement calculator, it will prompt you for a combination of entries. These are the main three that you need to change.

1. Account balance

It will be a reality check, with the S&P 500 SPX,
-0.21%
down 24% year-to-date through Tuesday. But maybe it’s not as bad as you think. If you have TMUBMUSD10Y bonds,
3.987%
or money in your accounts, you may not be as low as the Dow Jones Industrial Average DJIA,
-0.43%,
Nasdaq Composite COMP,
+0.25%
or some other major clue.

Depending on how much you’ve saved, you might be surprised that the dollar amount isn’t that huge.

But you won’t get an accurate picture of your future if you don’t start with what that number is today, rather than what that account was or what you think it should be.

2. Average rate of return

If you’ve based your retirement projections on average returns of 7% or something higher than your total portfolio, “I wouldn’t say you’re downright crazy, but, statistically, you’re looking at the top quartile of expected returns says Amit Sinha, head of multi-asset design at Voya Investment Management.

He says 5% is closer to reality. This will change your numbers, even over relatively short periods of time. Say you’re 55 and you’ve saved $100,000 for your retirement now. The difference over 10 years between these two assumptions is approximately $34,000.

If you shoot that for a 25-year-old, the difference over 40 years could be close to $800,000, although expected returns may eventually increase.

For now, experts like Sinha de Voya are calculating their assumptions down. “If you look at a balanced portfolio, your fixed income is between 4% and 6%; stocks are 5-7%,” he says.

But remember this is an average so half the time the returns will be higher and the other half the time lower and what you are looking for is a final number that will give you a high probability not to run out of money before you die. This means you have to assume the worst-case scenario and make sure that if returns bottom out, you’ll still have enough money.

After: How to turn $30,000 into millions: The power of time trumps lucky stock picking

3.Inflation

Fed Chairman Jerome Powell has set his inflation target at 2%. That’s probably a little too rosy to plan your retirement scenarios right now, given that the headline rate is over 8%.

The good news: you don’t have to go so high for your projections. “Current inflation is not really expected to last, so 2.5% is reasonable in the long term,” says Wade Pfau, a professor at the American College for Financial Services.

Although it seems like a small difference, even half a percent in the long run can hurt your returns. And that, in turn, has a big impact on how much you can spend each month when you’re actually retired.

At current rates, the old reserve rate of 4%, which was a safe withdrawal rate, is starting to look too high. “I would generally say 3% is a more appropriate number in today’s environment,” says Pfau.

Heed the alarm bells

Your new retirement number may be darker than what you’re used to, so be prepared to take action. “The change we are seeing right now requires change,” Sinha says.

How you are affected by this largely depends on your age and when you need to start withdrawing money to cover your living expenses. You may need to save more, retire later, or plan to have less later. If you’re still working and your time horizon is over 10 years, the alarm bells don’t need to ring just yet. You want an accurate picture, but you have time to keep saving and you don’t have to change your strategy.

But if you are 55 or older? Sit back and take note, because a lost decade would put you on the cusp of retirement. What if you’re older? “It’s that 60-70 window where what happens in the markets in those years will have the biggest impact,” Pfau says.

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