Are You on Track to Reach Your Retirement Goal?

March 26, 2015

retirementpicThe first step in retirement investing is to determine how much you’ll need to accumulate to fund a comfortable life in retirement. (To come up with a ballpark figure, click here.)

The second step is to consider how you can reach your goal number.

The two most common ways to try to grow your retirement account are to make regular contributions to your account (and adjust these contributions for inflation) and allocate your account for growth.

We looked at the importance of contributing to your retirement account in this post, and you’ll also want to consider the impact of different rates of returns.

Say you hope to retire in 25 years, and you’ll need a total of $1,500,000 for your eventual retirement. You’ve been saving for many years now and you’ve already accumulated $200,000, and you’ll continue to contribute $6,000 a year to your retirement account and increase these contributions over time to account for inflation.

How much of a return would you need to get to $1,500,000? The chart below looks at the three different rates of return: 7%, 6%, and 5% over 25 years.

retirementgoal

If you were able to earn an average return of 7% over 25 years, you’d meet your goal of $1,500,000. But if you earned a just percent less each year, you’d accumulate a substantial sum for retirement, but not enough to meet your goal.

While you can’t know in advance what rate of return your portfolio will earn over the next 25 years, you can look at long-term averages. Since 1950, stocks have gained 10% on an average annual basis, while bonds have returned about 6%. So if you need to earn at least 7% annualized, you will need at least some exposure to stocks, and with a 25-year time frame, you could have a substantial allocation to stocks. The Trinity study we mentioned in our post on how much you’ll need for retirement assumed investors had at least 50% invested in stocks. An allocation of  60% stocks and 40% bonds is commonly used by retirement plans.

If you would like a more personal assessment of your retirement needs and allocation, call us at 1-800-763-8639 and ask to speak with an investment advisor. We’ve been helping investors plan and invest their retirement accounts for decades.

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