MMM Newsletter and Website Header 10.2.15

By Rande Spiegelman, Charles Schwab & Company


Key points


  • If your risk tolerance is conservative to moderate, consider aiming for a portfolio that’s approximately 25 times as large as your withdrawal during the first year of retirement.


  • If you’re behind on your retirement savings, your options include saving more now, spending less in retirement, retiring later or working part-time after you retire.


  • Avoid ramping up your portfolio risk or assuming your investments will produce an overly optimistic rate of return.

If you’re behind on your retirement savings, you aren’t alone. Whether it’s due to bear-market setbacks, getting off to a late start, or other reasons, a lot of people are trying to catch up on their retirement savings. Fortunately, there are plenty of actions you can take right now—and even after retirement—to help maintain a standard of living you’re comfortable with. And in an era when traditional workplace pensions are disappearing and Social Security benefits may be reduced, your personal commitment to retirement planning and investing may be what makes the difference for you.

How much do you need to save?

If you’re an investor with a conservative to moderate risk tolerance and you want to maintain your inflation-adjusted standard of living for 30 years, we suggest shooting for a portfolio approximately 25 times as large as your first-year withdrawal. This translates into roughly a 4% withdrawal rate in the first year of retirement, adjusted for inflation thereafter.

That may sound ambitious, depending on how far you are from retirement, what you hope to spend and how much you’ve already saved. But the target above assumes a portfolio big enough to let you adjust your first-year withdrawal each year for inflation with a high level of confidence that the money will last for 30 years. You may settle for a lower level of confidence, work longer or spend less. Or a combination of trade-offs could work as well. The main thing is to stay flexible, as no single rule of thumb fits all circumstances. Consider the following ten ways to catch up on retirement savings (or make the most of what you have):

1. Spend less and save more now. It’s as simple as it is unpopular. Create a budget and put your expenses under the microscope. Earmark a portion of your next raise or bonus for retirement savings. You also may be able to consolidate loan balances into lower-cost, and potentially tax-deductible, forms of debt.

2. Max out your 401(k) or other employer retirement plan, especially if you receive matching contributions. If you’re age 50 or older, make catch-up contributions.

3. Contribute to a deductible traditional IRA or a Roth IRA, if you’re eligible. People age 50 and older can also make IRA catch-up contributions.

4. Talk to your CPA about small-business retirement account options such as an Individual 401(k), SEP-IRA, Qualified Retirement Plan (QRP)/Keogh or SIMPLE IRA, if you’re self-employed.

5. Save extra money in personal taxable accounts, if you’ve maxed out tax-advantaged accounts.

6. Spend less in retirement. We suggest you plan to need as much in retirement as when you were working, but you might be able to get by with less—especially if your mortgage is paid off, the kids don’t move back in and you don’t face dramatically increased medical costs.

7. Postpone retirement so you have more time to try to build a bigger retirement portfolio and shorten the time you’ll rely on savings. You can also increase your potential Social Security benefit by waiting to receive payments (up to age 70).

8. Work part-time. Many retirees find they enjoy the social interaction and sense of purpose as well as the income.

9. Consider tapping into your home equity as an additional source of retirement income. You may scale down to a smaller home in retirement and pocket the difference.

10. Settle for a lower level of confidence that your portfolio will last. While we recommend aiming for a 90% chance of making your savings last, there’s nothing magical about that number. Consider your health and life expectancy—among other factors—and decide if you can live with a slightly lower level of confidence.

Words of caution

Be careful about ramping up portfolio risk to try to meet your retirement goals. Unless you were irrationally conservative to begin with, you can’t suddenly make yourself more risk-tolerant. Also, shoot for a realistic rate of return — which may be lower than the returns that many of us have come to expect from our stock portfolios.

At Schwab, our long-term outlook on stock and bond market returns is significantly lower than the historical annual compound returns for the 1970-2013 time period, for two reasons. First, we expect lower-than-average inflation in the future. Second, we still expect real interest rates to remain low.

In order to cope with a low-rate environment, we recommend staying diversified and sticking with your long-term asset allocation plan to potentially maximize expected returns for your level of risk. The most important things are getting started and staying the course with your retirement savings plan.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC’s) Monday Morning Minute is crafted to provide decision-maker’s with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Additional Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. Diversification does not eliminate the risk of investment losses.