Determining how much money to save for retirement can be difficult, but it does not have to be that way! There are many things that go into saving for retirement. Let’s walk you through key sections step by step to ensure you understand the fundamentals of your plan.
The main goal of this process is to give you confidence in reaching your goals. Your plan evaluates your goals in three different ways. It looks at the estimated percentage of goals funded using both average returns and bad timing. First is average return – if your plan has a steady return over time, the plan estimates the portion of goals funded. It is important to note that markets do not always act this way, so just looking at average return is not enough. The second is bad timing – alternatively, this approach assumes you get a steady return, but in the early stages of retirement, you experience negative returns, which can have a big impact on how well you can fund your goals when you are withdrawing assets from your portfolio. This is a somewhat conservative approach to help you understand what can happen if you retire in a down market. Lastly is the probability of success – this is the most realistic analysis that considers many future possibilities to ensure you are confident about reaching your goals. It represents 1,000 different possible scenarios and evaluates how well your portfolio performs in each, to determine an overall level of confidence that you may be able to meet your goals.
If your current scenario does not put you in the confidence zone, this section will highlight some changes that you can consider increasing your chances of success, i.e., your recommended scenario. This is a good section to review with your advisor so you can discuss where you are willing to consider trade-offs.
Are you in your confidence zone? Your probability of success should be high enough to inspire confidence in the future without sacrificing too much today. The higher the better, and a number in the 90% range may mean you can do even more than you originally planned.
It’s time for action! What steps should you take to get started? Compare your current and recommended scenarios to see how specific changes to your plan can help improve the likelihood of reaching your goals. Review your goals for retirement that you and your advisor developed as well as the resources you identified to fund those goals. These are the key factors that drive the results of your plan, so it is important to make sure they accurately reflect your expectations.