Crunching the numbers on retirement

You were getting close to retirement, and you’d thought you’d saved enough.

And then the market tanked.

So, you decided to stick it out and try to regain what you’d lost. Other changes to your portfolio structure or your investing strategy could wait.

You’re certainly not alone. Data from the Commerce Department show that Americans’ savings rates are climbing: In April, personal savings as a percentage of personal income topped 5%. In May, it shot up to 6.9%—something we hadn’t seen in 15 years or more.

We’re all hoping that this change is permanent. Time will tell. But for those of us who are in savings hyperdrive to fill the void in our portfolios, how long will it take to get back to where we were before the tumble?

An interesting calculator on Kiplinger.com offers some insights. It may take some of the uncertainty out of your “repair horizon”—better to have some general idea of what it’s going to take than leave it all to chance. And if you’re expecting to postpone retirement because of the market slump, it can help you estimate how much longer you’ll have to work.

To use the tool, you’ll need to know how much money you had before the downturn, and how much you have now. (For most of us, that’s going to be a painful calculation.) You’ll also need two of the following:

• An estimated future rate of return on your investments.
• The amount of money you plan to invest each year.
• The number of years you want to spend waiting to recover what you’ve lost.

To try it out, I started with a hypothetical portfolio worth $650,000. I then subtracted 28% ($182,000), for a current net portfolio of $468,000. (The market has come back somewhat in recent months; otherwise the gap would have been greater.) Plugging in the “before” and “after” numbers along with an assumed return of 3% and a recovery period of four years, the calculator tells me that my hypothetical investor would need to save $28,604 each year for four years to get back to where her or she had started.

That may be more realistic than it sounds. If you can “max out” your annual 401(k) contributions—currently $22,000 if you’re over age 50—you’re well on your way to $28,604. Matching contributions from your employer and additional after-tax savings would get you even closer, and might give you a shot at retiring on or close to your original schedule.

If maxing out your 401(k) contributions is too tough, try contributing $15,000, including an employer match. Again assuming a 3% annual return, your recovery period would be six years. Bumping your return up to 5% shaves off a year.

These are not precise answers by any means, but they do suggest that working an extra year or two simply won’t be enough for most of us.

Incidentally, I understand why the calculator asks you to pick an assumed rate of return: No one wants the liability that comes from promising a specific return. But relying on any assumed return is wishful thinking. Stay focused on the things you can control, such as investment costs, contribution levels, diversification, and savings rates. Leave the predictions on markets, trade deficits, corn futures, and rates of return to the economists—they can get it wrong and no one will be surprised!

Notes:

• All investments are subject to risks.
• Diversification does not ensure a profit or protect against a loss in a declining market.
• The hypothetical example does not represent the return on any particular investment.
• The links to BEA.gov and Kiplinger.com will open new browser windows. Vanguard accepts no responsibility for content on third-party websites.