So Am I on Track for Retirement?
“So, am I on track?” It’s a question that frequently comes up during money conversations with young professionals and one that can rarely be answered with a simple “yes” or “no.” An educated and realistic response to that question requires a laundry list of follow-up questions to be answered to get an accurate assessment.
The answer to a seemingly simple question is not only clouded for young professionals by the innumerous assumptions that must be made to estimate an answer, but more importantly in many cases young professionals are just stepping up to the retirement tee box when it comes to planning for their financial future. In most cases there are likely two, three, possibly four decades before a young professional will officially “retire.”
As young professionals step up to the retirement tee box and pull out their driver they open themselves up to a world of uncertainty. Similar to the wide range of possibilities that exist using an actual driver—the ball could go 250 yards left or 250 yards right. Conversely, those in or nearing retirement, often find themselves chipping or putting onto the green—fine tuning their positioning for retirement—limiting the potential outcomes given the simple fact that their time frame is so much shorter.
Redefining What Retirement Means
The other factor complicating whether or not individuals are on the right track is that retirement is largely being redefined by millennials and Gen Xers. Gone are the days of being married to a company for 30 years both out of loyalty and necessity in an effort to hang onto a pension (where the company funds a future retirement benefit) that would support a comfortable retirement.
Instead young professionals are looking to balance both living for today while planning for a sustainable future. The idea of working in a miserable job for three decades only to then be able to enjoy life is almost incomprehensible to millennials and Gen Xers. It’s this mentality—which also has its downsides—that is causing young professionals today to reevaluate the proverbial American dream and what retirement looks like.
As young professionals eventually near and enter into retirement in future decades it’s likely that retirement will include various forms of part-time work. Work at that point will become much more of an outlet to keep engaged and fulfilled, in addition to helping support an increasingly long retirement as life expectancy continues to increase.
Retirement Checkpoints
Despite the difficulty in answering a seemingly basic question, there are in fact ways to provide a rough estimate of whether or not an individual is on track for a traditional retirement. JPMorgan’s annual Guide to Retirement provides checkpoints young professionals can use to determine if their current savings are in-line with where they should be given two simple known facts: their age and income.
In the chart below, if you’re a 35-year old young professional making $75,000 per year you should have approximately 1.6 times your salary saved up for retirement to be on track. Anything less than that and you’ll have some catching up to do.
How to Move the Needle
Lastly, it’s important to understand how to move the retirement readiness needle. Many young professionals are likely familiar with the term KPI or Key Performance Indicator, but for those who aren’t, KPIs are critically important metrics that help dictate future success. KPIs are the two to three activities that will provide a high probability of success in any endeavor if done consistently.
When it comes to retirement readiness there are two critical KPIs that will give you a high probability of being able to retire comfortably on your terms. Those two things are: (1) how much you save and (2) at what rate your money grows. The first KPI you control entirely, while the second critical action you only control to a point.
Young professionals should shoot to save at least 10-20% of their income in preparation for a traditional retirement. Those also paying off student loan debt will want to be sure to save enough to get the full employer match, while gradually working towards saving 10-20% of your income as loans are repaid.
When it comes to the second KPI it’s important to understand an important distinction. You cannot ultimately control the return on your investments—despite the media constantly pretending you can. However, you can control the amount of risk you take with your savings and investments which is directly correlated to approximately how much your money will return over the long-run.
For example, if you put your money in a savings account you will be taking virtually no investment risk. However, your money will also not grow over the long-term leaving you with no more money than when you started (especially after accounting for inflation).
On the flip side, if you invest your hard earned savings in a low-cost, well-diversified portfolio of stocks and bonds, you are taking more risk but also increasing the chances of increasing your money at an appropriate pace. By investing in both stocks and bonds, you also minimize the amount of risk you’re taking relative to an all stock portfolio.
Ultimately focusing on consistently increasing your savings at an appropriate rate, while also ensuring that your investments are properly diversified is critical to making sure when you ask that simple question “am I on track for retirement?” You can answer yes with a high degree of confidence.
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