Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work

The aim of traditional retirement planning is to set a wealth accumulation target for your retirement date so that your desired expenditures can be obtained using a “safe” withdrawal rate. But it is quite difficult to know if you are making progress toward this target. Volatility over short periods of time strongly limits the usefulness of using your current wealth accumulation at ten or even five years before retirement to predict your final retirement wealth. Fortunately, it is not necessary to focus on a retirement wealth accumulation target. The accumulation and retirement phases should not be treated separately in this way. This paper outlines a framework for considering if someone in mid-career is on track for a sustainable retirement. It investigates what combinations of savings rates and years of continued work would have allowed someone to have always accumulated enough by retirement to afford one’s desired retirement expenditures in all of the rolling periods from the historical data. A strategy is “safe” if it worked in the worst-case offered thus far by history. I consider a 55 year old as a case study to show what savings rate will be needed to retire 10 years later, or how much longer one should work with a variety of other savings rates. Results are shown for a wide variety of situations. These findings can potentially serve as a reality check about the sustainability of one’s retirement plans.