Retirement planning depends on more than how much you save. Your investments may not perform as expected, inflation can erode purchasing power, and you may have to stop working sooner than planned. In a Halloween special, Motley Fool co-founder David Gardner and retirement expert Robert Brokamp discussed two risks that can derail retirement plans and ways to test whether those plans are on track.
Many retirement accounts may fall short of lifestyle goals
Vanguard data cited by Brokamp indicate that just 41% of Generation X and 42% of millennials are on track to accumulate enough assets to maintain their current standard of living in retirement. A Morningstar report found that 46% of Americans would have sufficient retirement savings if they retired at 62. The share rises to 55% for those who wait until 65, underscoring how a few additional working years can affect retirement readiness.
The Federal Reserve’s Survey of Consumer Finances puts the median retirement account balance for U.S. households at $106,000. Younger households pull down the overall figure; among households headed by someone aged 55 to 64, the median is $239,000. Brokamp estimates that $239,000 could generate roughly $10,000 to $12,000 in annual retirement income. People nearing retirement therefore need to assess their savings alongside Social Security, other assets and expected expenses.
Gardner noted that retirement means different things to different people. Some want to stop working entirely, while others would rather reduce their hours and devote more time to other pursuits. Brokamp said retirement’s effects on health and well-being also vary. Some studies have linked retirement with depression or a higher risk of earlier death, while leaving physically demanding work sooner may benefit some people. Work conditions, personal goals and finances all factor into the decision.
Health and job loss can bring retirement forward
A second risk is relying too heavily on forecasts. Retirement calculators typically ask users to estimate investment returns, inflation, spending and retirement age. Even modest differences in those inputs can compound over time and materially change the results. Brokamp recommends using cautious assumptions and not treating a planned retirement age as certain.
A Transamerica Center for Retirement Studies survey found that 58% of retirees left work earlier than planned. A separate survey by the Society of Actuaries put the figure at 59%. Some retire early because their investments have grown quickly or their household is financially ready. Others leave because of health problems, the need to care for a spouse or job loss.
Brokamp cited a 2018 Urban Institute study finding that slightly more than half of workers in their early 50s lose their jobs. Of those, only one in 10 finds another job paying as much as the previous one. Age can make a job search take longer, and some people retire after struggling to find work even when their savings are not yet sufficient.
Stress-test plans with more cautious assumptions
For investment returns, Brokamp recommends using an assumption of no more than 8% in retirement projections. He uses 6% himself and says he has gradually adopted a more conservative portfolio allocation as retirement approaches. He also suggests testing a scenario in which retirement starts three years earlier than planned. In an Employee Benefit Research Institute survey, most people still working expected to retire at 65, while retirees reported an actual average retirement age of 62.
If projections show a savings gap, Brokamp suggests increasing IRA and 401(k) contributions where possible, raising the savings rate as pay increases, and directing bonuses, tax refunds and other irregular income toward retirement savings. He also mentioned paid planning tools including Boldin, MaxiFi and ProjectionLab. Brokamp disclosed that Motley Fool Ventures, an affiliate of The Motley Fool, has invested in Boldin.
The discussion’s central point was to revisit assumptions and compare them with actual progress regularly. A single projection cannot guarantee when someone will be able to retire, particularly when health and employment can change the timeline.