Retirement Plan: Am I On Track?

Metolius River with Mt. Jefferson in the background.

Retirement planning is a primary motivator for saving and setting up an investment portfolio.  Are there any saving guidelines for the individual investor?  Below are a few and I suggest you check out William Bernstein’s words of wisdom.  Search “Bernstein” on this blog.  To gauge whether or not your retirement savings program is on track, Fidelity Investments recommends the following.

• In your 30s have a retirement savings equal to your annual salary.  If you are earning $40,000 per year, have a savings or portfolio worth $40,000.
• In your 40s, the retirement savings needs to be 3 times your current salary.  If you are earning $50,000 per year your portfolio should be up to $150,000.  I think readers are getting the picture.
• If you are 55 years old and earning $80,000 per year your portfolio should be 6 times your current salary or close to $500,000.
• When you are in your 60s and close to retirement, your savings or portfolio is recommended to be 8 times your salary.
• Unless you are fortunate to have a sizable pension income, plan on saving between 1.2 and 1.5 million for retirement.

Another rule of thumb to throw into the calculation comes from Bernstein.  If you are fortunate to receive a pension and eventually Social Security, think of them as “bond equivalents.”  While you don’t own the investments that are throwing off the pension, there is a corpus of money lurking in the background that provides for the retirees well being.  Assume a pension income of $4,000 per month and another $1,500 per month coming in from SS.  That $4,000 per month is $48,000 per years plus another $18,000 from Social Security for a grand total of $66,000 per year.

To compute the “bond equivalent” divide the annual income by 0.05 or $66,000/0.05 = $1,320,000 or $1.3 million.  If the pension or SS were high risk incomes, then increase the 0.05 to 0.06 or higher.  Once more – while you do not own the $1.3 million, that is the capital that provides the steady monthly income.  When this is the case, one can take a higher risk position with a retirement portfolio.