How to Know If You’re On Track for Retirement

Most folks have never run a retirement-income projection. How can they make a realistic plan? Here's a start.

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If you don’t know, then you’re not. That is one of the chief conclusions of a new retirement preparedness study, which asked employees of all ages if they are on track to retire with the recommended 70% to 80% of pre-retirement income.

Those who are on track, and know it, scored an average 7.2 (out of 10) on a financial wellness index created by research and education firm Financial Finesse. Those who had no clue if they were on track scored about the same (4.7) as those who knew they were not (4.2).

(MORE: Downgrading the American Dream)

This is hardly shocking. Cluelessness rarely works in your favor. The findings should jolt people, especially those in their 50s and 60s, into taking at least a cursory look at their retirement income plans while they still have time to adjust.

Most folks have never run a retirement income projection, including a hard-to-believe 57% of those aged 55 to 64, the study found. You expect such ambivalence from younger folks and, indeed, 73% of employees under 30 say they have never projected their retirement income. This is shocking in its own way. That means at least some — about one in four — really young workers have already started thinking about it. Good for them.

It’s not all that tough to get a look at where you stand. Using an online calculator, plug in key data like your accumulated savings and future savings rate. Within seconds the calculator will tell you what your projected monthly income is and how much more you’d need to save now to boost your income in retirement to a comfortable level.

This is a simple model, of course, and it requires some guesstimates about inflation and investment returns. You’ll also need to consider other income sources, like Social Security. But it’s a quick way to see if you are even in the ballpark.

(MORE: Modern Retirement: Mortgage and Kids Still at Home)

The three top indicators of retirement preparedness, according to the study, are having an emergency fund, never carrying a credit card balance and having a plan to systematically pay down all debts. These have a high correlation with being on track. If you’re doing them you’re probably fine.

But why not look at the projections anyway? The stakes are high. As the study points out:

  • Employers are shifting the burden. Less than 17% of employees will receive income from a traditional pension plan, down from 62% in 1983. Social Security is expected to replace less retirement income with recent changes to normal retirement age and anticipated changes needed to shore up the system.
  • Home equity has been decimated. The ratio of homeowners’ equity to value has slipped to 38%, the lowest on record. Before the Great Recession, this ratio rarely fell below 60%.
  • The stock market has been a bust. From 1926 through 2000, the S&P 500 had an annualized return of just over 11%. Since then it has had an annualized return below 2%. With interest rates near historic lows, investors must be prepared for a new normal when it comes to investment returns.
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