How can I grow my retirement savings without too much risk?

— I’m 66 and have $170,000 to invest, but I don’t want to take a lot of risk with it. So how much should I invest in stocks and how much should I keep in bonds — and should I consider investing in an annuity? –E.H.

I get that once you near or enter retirement, you don’t want to do anything too risky on the investing front. After all, you don’t want to jeopardize the savings it took you a career to accumulate.

But you’ve also got to remember that there are different types of risk you need to protect yourself against. Most people, understandably enough, focus on the risk that they’ll lose money if they invest in stocks and the stock market subsequently goes into a deep slump. And if that were the only risk you had to worry about, you could easily avoid it by putting all your money in bonds or even in cash.

Doing that, however, would leave you vulnerable to another risk — the risk that the returns you earn are too low to provide the growth necessary for your savings to support you throughout a post-career life that could easily last well into your 90s. You could end up running out of money too quickly or, to avoid that possibility, find yourself forced to dramatically rein in your spending.

Which is to say that you really should be thinking not so much about avoiding risk altogether. That’s impossible. Rather, you should consider how you can balance different risks — in this case, the risk of seeing the value of your stash plummet in the short-term versus the possibility that your money may not be around long enough to support you for the long-term.

So how do you do that? You can start by completing this risk tolerance-asset allocation questionnaire from Vanguard. The tool suggests an appropriate mix of stocks and bonds. By clicking on the link to “other allocation mixes,” you can see how your recommended mix as well as others more conservative and more aggressive have performed on average over the past 90 years, including each stocks-bonds allocation’s best year, worst year and the number of years each mix has suffered a loss.

This is no guarantee of how a given mix of stocks and bonds will perform in the future. But it should give you an idea of how different allocations should fare relative to one another in the future, and certainly offer a sense of how much more (or less) volatility you can expect as you move more money into (or out of) stocks.

But don’t stop there. Presumably, if you haven’t started doing so already, you’re going to be drawing on your $170,000 for spending cash to supplement the income you’ll receive from Social Security. So in addition to guarding against outsize losses from stock market swoons, you’ll also want to ensure that the stocks-bonds mix you settle on doesn’t put you at risk of depleting your assets too early in retirement.

You can see how different stocks-bonds allocations are likely to hold up in the face of different levels of withdrawals by going to a tool like T. Rowe Price’s retirement income calculator. The calculator will estimate the probability that your savings will last until you’re 95. (Age 95 is the default setting, which I think is about right given today’s longer lifespans. But if you’d like to see your chances of living to various ages based on your current age and health status, you can check out this Longevity Illustrator tool).

By running a variety of different scenarios with different asset mixes and withdrawal rates, you can see how the chances of your money lasting throughout retirement might change as you invest more (or less) in stocks and raise (or lower) your withdrawal rate. And if you go through this exercise, what you’ll find is that you have pretty wide leeway in how you allocate your assets between stocks and bonds, provided you don’t overdo it on withdrawals from savings.

Generally, as long as you go with an initial withdrawal rate of 3% to 4% (and then adjust that initial withdrawal for inflation each year), you have a pretty good chance (roughly 75% to 80%) that your savings will last at least 30 years if you invest anywhere from, say, 30% to 70% in stocks.

You can invest more in stocks, if you think you can handle the volatility. But don’t expect that moving from a moderate allocation of stocks to a higher one (say, 80% or more) will necessarily increase the chances that you won’t run through your savings. The reason is that at some point the higher volatility that comes with stocks makes you much more vulnerable to market setbacks and can even begin to drag down the chances of your nest egg lasting 30 or more years.

In short, as long as you don’t go overboard on withdrawals, you can likely find an allocation that jibes with your tolerance for withstanding potential short-term losses due to market setbacks, and at the same time affords decent assurance that you won’t deplete your savings too soon.

Keep in mind, though, that we’re talking about estimates here, not promises. No tool or calculator can predict how the financial markets will behave in the future. So you need to be flexible about how you spend down your savings, perhaps dialing back the amount you withdraw after a market downturn or string of lousy returns and withdrawing more if the value of your nest egg begins to swell after several years of excellent investment performance.

If you want greater assurance that you’ll be able to rely on at least some income aside from Social Security and any pensions to support you throughout a long retirement, you might consider devoting a portion of your savings to an annuity.

There are lots of different types of annuities, some, such as variable annuities and fixed index annuities, marketed more heavily than others. But for retirees looking to ensure that they’ll have guaranteed income no matter how long they live and regardless of how the financial markets perform, I think an immediate annuity (which converts a lump sum into a lifetime stream of monthly payments that starts immediately) or a longevity annuity (which makes payments for life starting at some point in the future, say, 10 or 20 years down the road) is a simpler and better way to go.

You can get an estimate of how much monthly income you might receive from an immediate or longevity annuity based on your age, sex, the amount you invest and when you would like payments to begin by going to this annuity payment calculator.

That said, annuities, like all investments have downsides. To see whether you’re a likely candidate for one, check out this column that outlines their pros and cons for different situations.”

Finally, once you’ve arrived at a stocks-bonds mix that you feel is right for you, don’t change it just because your gut tells you stock prices are ready to tank (or soar to new highs). Instead, except for rebalancing occasionally or possibly shifting to a more conservative blend of stocks and bonds if you become more risk averse as you age, you should pretty much maintain the mix you arrived at after going through the exercise above.

Otherwise, you may run afoul of yet another risk: that far from improving your prospects, following your gut instinct will leave you worse off than you were before.

How to get your retirement savings on track

— I’m in my 30s and want to know whether I’m on the right track for retirement. How do I go about doing that? — Mike, Connecticut

The close of one year and the start of a new one is a good time to take a fresh look at your retirement planning to determine whether you’re making progress and, if not, take steps to improve your prospects. Unfortunately, many people fail to do such an assessment at any time of year. Fewer than half of workers have tried to calculate how much they need to save for a comfortable retirement, according to the Employee Benefit Research Institute’s 2015 Retirement Confidence Survey, and nearly 40% admit that they simply guess about how much they’ll need rather than do an analysis.

Which is a shame because evaluating whether you’re on track isn’t all that difficult. The easiest way to get a handle on where you stand is to rev up a good retirement income calculator that uses Monte Carlo simulations to make its projections. By plugging in such information as how much you’ve already managed to save, how much you’re contributing to retirement accounts each year and how much of your current income you’ll need to replace in retirement, you can come away with a pretty good sense of whether you’re making adequate headway toward a secure retirement.

There are several online calculators that can help you with such an assessment. I’m partial to the T. Rowe Price Retirement Income Calculator because it’s easy to use and, unlike other tools that attempt to identify your “Retirement Number,” or the size of the nest egg you need to accumulate in order to retire, the T. Rowe tool estimates the chance that you’ll be able to generate the lifetime income you’ll need to maintain your standard of living in retirement. By focusing on income rather than a lump sum, I think you end up with a better sense of where you stand, whether you’re making progress and how various moves might be able to improve your odds of success.

Here’s an example. Let’s say you’re 35 years old, earn $50,000 a year, have one year’s salary already saved for retirement and that each year you contribute 10% of pay to your retirement accounts. And let’s further assume that you invest your savings in a mix of 80% stocks-20% bonds. Based on that scenario, the calculator estimates that you would be able to generate 75% of your pre-retirement salary from a combination of Social Security plus draws from your retirement nest egg with a 56% chance of sustaining that income at least until age 95. In short, if you continue on the path you’re on in the example above, you have a little better than 50-50 shot at a reasonably comfortable and secure retirement.

But one of the benefits of doing this sort of analysis is that you can also easily see how you might improve your retirement prospects. Increase your annual savings rate from 10% of pay to 12%, for example, and voila! Your chances of retiring on 75% of your pre-retirement salary climb from 56% to 64%. Boost your savings rate to 15%, and the probability increases to 73%. And if you save at a 15% annual rate and stay on the job two more years, your chances jump to 86%, in part because your Social Security benefit increases by roughly 15% for delaying two years but also because the extra years on the job allow you to contribute more to your retirement accounts and provide more time for those accounts to grow.

By the way, people who are already retired should go through a similar analysis, except that instead of homing in on their saving rate and planned retirement age, they should focus mostly on whether they’ll be able to continue their current level of spending without outliving their nest egg. Retirees can use the T. Rowe calculator or the American Institute for Economic Research’s Retirement Withdrawal Calculator, as both essentially estimate how long your savings might last given your current rate of spending and how your money is divvied up between stocks and bonds. Whichever tool you use, I recommend retirees also do a retirement budget to get a more accurate sense of how much they’ll need to spend to maintain their standard of living.

I want to emphasize that these and similar tools yield projections, not certainties. A lot can happen over the course of a long career (and a long retirement) that no calculator or tool can foresee. The markets could take a nosedive or deliver subpar returns for a prolonged period. You might not be able to maintain your savings regimen because of a job loss. A financial emergency could force you to dip into your savings.

But by going through this sort of exercise initially and then and re-doing it periodically with updated information about the size of your retirement account balances, how much you’re saving or spending, etc., you can gauge your progress and make necessary adjustments as you go along. This sort of monitoring and occasional tweaking can give you a more realistic sense of whether you’re really prepared for your post-career life and prevent you from finding on the eve of retirement that you’re way, way behind where you need to be.

Ideally, you should combine this check-up with a review of your investments to ensure that your retirement portfolio is invested in a way that is likely to generate adequate returns while remaining consistent with your tolerance for risk. As part of that investment review, you may want to rebalance your holdings and even consider doing some tax-loss harvesting in taxable accounts, or selling shares to realize capital losses that can offset realized capital gains and, possibly, ordinary income. To have such losses count for the 2015 tax year, you must sell the shares before the end of the year. (If you do sell to realize a loss, take care that you don’t screw up the maneuver by running afoul of the “wash-sale” rule.

If you’re not comfortable doing this sort of retirement check-up on your own, you can always turn to a financial adviser for help. But if you eventually want to have a secure retirement, you need to find out where you stand and, if necessary, start making moves to enhance your prospects.


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How much do I really need to save for retirement?

— I always thought 10% of salary was the amount you need to save for retirement. I save more than that, but a retirement calculator told me I’m not saving enough. Am I on track or is retirement just an impossible dream –Jessica, Texas

I wish I could give you a simple-but-accurate rule of thumb that could assure you’re saving enough to stay on track toward a secure retirement. But I can’t because there isn’t one.

The 10%-of-salary figure you cite is often tossed around as a viable benchmark — and it might be if you start saving that amount in your early 20s and stick to it faithfully over the next 40 or so years. But few of us actually adhere to that regimen. We get a late start or have years when we save less than 10% or we may even dip into our savings occasionally. To allow for more leeway in building a nest egg, many pros suggest a higher target of 15%, which is the figure cited in recent research by the Center for Retirement Research at Boston College.

But the reality is that no percentage or formula can cover all situations. There are just too many variables that affect how much you need to save, including how much you already have in savings; the retirement lifestyle you envision; how much of your pre-retirement income you’ll need to replace once you retire; the age at which you call it a career; how you invest your savings prior to and during retirement; and how long you expect to live.

And then you’ve got to throw in the major wild card of health care expenses, which, depending on how much medical care you need later in life and how much the cost of such care rises, can have a major impact on the size nest egg you’ll need and thus how much you must save to build it.

That said, you’re taking the right approach by going to a calculator for some guidance. But as you do that, it’s important to remember that no retirement calculator can duplicate the complexity of the financial markets and real life. Some can do a good enough job, however, to give you a decent idea of whether you’re making headway toward retirement. There are plenty of such calculators out there, but I like T. Rowe Price’s Retirement Income Calculator because it’s relatively easy to use, makes reasonable assumptions and doesn’t just spit out “Your Number,” or the dollar value of the nest egg you’ll supposedly need at retirement. Rather, it uses Monte Carlo simulations to estimate the chance that you’ll be able to generate the retirement income you’ll need given your current savings rate, the amount you’ve already saved, your investing strategy and other assumptions. (If you’re already retired, the calculator estimates your chances of being able to continue spending at your current pace throughout retirement.)

Here’s an example: Let’s say you’re 35, earn $50,000 a year, already have $75,000 saved in a mix of 80% stocks and 20% bonds and you save 15% of salary each year. Based on that information and some other details, the calculator estimates that you have nearly an 80% chance of being able to replace 75% of your pre-retirement salary, assuming you retire at age 65 and expect to live to age 95.

But the savings rate required to achieve that probability of success in the above scenario can change significantly if you alter just one or two key assumptions. For example, retiring at 62 instead of 65 would require an estimated savings rate of 20% or more to maintain roughly the same chance of success. That makes sense when you figure that leaving your job three years earlier means you’ll have less time to build a nest egg that will have to support you for a longer time — and because you’ll also qualify for smaller Social Security payments if you claim at age 62.

On the other hand, postpone retirement by two years to 67 and the estimated savings rate to replace 75% of your pre-retirement salary drops to 12% or less, since you’ll qualify for a larger Social Security benefit and have more time to contribute to retirement accounts, more time for your savings to grow and fewer years that they’ll have to support you.

Of course, these savings rates and probabilities of success are just estimates, not guarantees. Any forecast is going to have a certain amount of inherent squishiness, if you will, especially when it involves so many factors. If future investment returns are significantly lower than in the past — which a number of pros think will be the case — then all else equal you may have to save more to maintain the same shot at a secure retirement.

On the other hand, research on retirement spending suggests that the percentage of pre-retirement income retirees actually require to maintain their lifestyle can vary dramatically depending on their financial circumstances. So if you’re able to live an acceptable retirement lifestyle on a lower percentage of your pre-retirement salary, you may be able to get by with a lower savings rate.

How, then, can you be reasonably sure that you’re saving adequately for a secure retirement with so many factors at play? Rather than relying on a rule of thumb of 10% or any other benchmark, I recommend that you go to a good retirement calculator, plug in details about your savings rate and retirement account balances and see where you stand given what you’re currently doing. If you discover that your chances of being able to retire when you would like are uncomfortably low, re-run the analysis to see how saving more, retiring later, investing differently (or making several changes simultaneously) might improve the odds. You can then repeat this exercise every year or two and, if necessary, adjust your savings regimen to stay on track.

I can’t guarantee that going through this exercise periodically and making occasional tweaks will guarantee you a secure and happy retirement. But it should make it less likely that retirement will be an impossible dream.