Individuals who save in a very responsible way can end up experiencing very different retirement outcomes on account of the market returns they experienced during the specific years of work and retirement. Through no fault of their own, some people will be saving at a good time (strong market returns in the years just before and after their retirement, which impacts wealth accumulations and sustainable spending rates), while others will not be so lucky.
Is now a good time to retire? My Retirement Dashboard aims to help answer this question by tracking the situation of a hypothetical benchmark retiree couple reaching age 65.
First, the Retirement Wealth IndexTM shows the accumulated wealth (as a multiple of salary in the final working years) for someone saving 15% of salary each year over a 30-year period from age 35 until retirement at age 65.
The next chart shows the cost for this couple to buy $1 of inflation-adjusted joint lifetime income based on real interest rates and Society of Actuaries longevity estimates for each month since 1982.
Next, the Retirement Affordability IndexTM incorporates current market conditions to determine the gross replacement rate from pre-retirement salary which can be sustained with the accumulated retirement wealth. Calculations are based on supporting an inflation-adjusted spending stream over a lifetime using the cost of retirement income shown in the previous chart.
As an example for how these indices work, a retiree whose final salary was $100,000 would have accumulated $970k. Given current interest rates and longevity, the cost of a real dollar of lifetime income for the couple is $26.87. Retirement savings could purchase of $37,300 of inflation-adjusted lifetime income. This represents at 37.3% replacement rate from pre-retirement salary.
The next table provides information about sustainable spending using bond ladders and income annuities in the present interest rate environment.
Next, I estimate sustainable spending rates with specified allowances for portfolio depletion using volatile investment portfolios (stock and bond funds). These strategies have greater downside risk which is why the sustainable spending rate can potentially be less than found with dedicated income. However, these strategies also have greater upside growth potential to allow for more future spending or to provide a greater legacy. Upside potential is not reflected in the table.