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How to evaluate your retirement portfolio: The full breakdown

At a glance:

  • Calculate your retirement income

  • How much more you'll need for retirement

  • Make adjustments for retirement

  • Summary of are your retirement savings on track?

It’s highly likely that Social Security and your pension or retirement plan will only partially subsidize your dreams.

According to recent government estimates, Social Security replaces about 40% of the average worker's pre-retirement earnings, and that percentage may fall even lower in the future.

Pensions or employer-sponsored retirement plans don't always cover the rest. Your own savings will more than likely make the difference between a retirement of jet-setting and one of sweater knitting.

So in addition to monitoring your retirement portfolio and rebalancing as necessary, you should also calculate whether that portfolio is returning what it needs to be returning for your dream retirement.

Here's how to do just that.

Holly Creek resident, Herb Bowman, 81, checks his email on his computer inside his apartment at the retirement community Wednesday morning. (Photo: Andy Cross/The Denver Post via Getty Images)
Holly Creek resident, Herb Bowman, 81, checks his email on his computer inside his apartment at the retirement community Wednesday morning. (Photo: Andy Cross/The Denver Post via Getty Images)

Calculate your retirement income

The first step to finding out whether your retirement portfolio is on track is determining what your regular retirement income will be, excluding your income from your own savings.

Start with Social Security

Request a Personal Earnings and Benefit Estimate Statement from the Social Security Administration to find out what you can expect each month from Social Security.

Some people already receive this yearly, but if you haven't seen it yet, submit the form (which you can download or request over the phone), and the Social Security Administration will send you a list of estimated benefits, including your monthly retirement check in today's dollars. Remember that Social Security benefits rise with inflation.

If your Social Security benefits seem too skimpy, it’s worthwhile to check in. They may not have updated name changes, or using a name other than the one on your Social Security card, or entering an incorrect Social Security number can lead to inaccurate benefits calculations.

Troubleshoot by checking your benefits every few years.

Add in your retirement plans

Projecting what your retirement or pension plan will provide requires more legwork.

First, know the reasons behind your expected future payments. Defined-benefit plans, such as a pension, often are linked to Social Security payments. Consequently, a fatter Social Security benefit could mean a slimmer pension check.

Second, be persistent about seeking information. Some plans will update you regularly about your benefits as you near retirement. Others aren't as accommodating.

Pester your employer's human resources department for more information. If you get the run-around, turn to Washington.

Call the Pension and Welfare Benefits Administration to find the Department of Labor office in your area.

Finally, don't overlook those pensions owed you from brief employment stints or from companies that have merged out of existence or gone belly up.

Check the Pension Search Directory online to discover whether you're one of the thousands of people who haven't claimed forgotten pensions.

How much more you'll need for retirement

Compare your expected pension and Social Security income with the amount of income you think you'll need. Determine whether or not your current investments will cover the difference between the two figures.

Remember that you probably won't need the entire lump sum of your retirement costs the minute you retire. More than likely, your investments will continue to grow during your retirement.

Be careful with assumptions

Many web-based programs demand a major assumption: the return you expect from your investments.

Those with stock-heavy portfolios may be eager to plug in high numbers based on what the S&P 500 or other indexes returned at certain times, but those figures might not be accurate.

Actual historical returns

Since 1926, large-company stocks typically have returned a more sedate 10% per year, according to Ibbotson Associates' Stocks, Bonds, Bills, and Inflation. Investors retiring in 10 years or sooner should assume an even lower return — more like 8% per year.

It's always better to use conservative projections and be surprised on the upside.

Intermediate-term bonds returned 5.5% per year, on average, between 1926 and 2018, a fair return to use for your bond positions. For cash, use the 3.3% average return of Treasury bills.

Make adjustments for retirement

If your current portfolio isn't generating the type of return you'll need for your retirement, consider the following.

Rethink your retirement lifestyle

Separate your needs from your wants.

One way to save big: Lower your housing costs. Moving from a $300,000 home to a $200,000 home not only means more cash in your pocket but probably lower upkeep expenses too.

If retirement is far enough away, get more aggressive

Trade some of your bond funds for conservative equity funds, or swap high-dividend stock funds for growth types.

Put off retirement, or work part-time

People of full retirement age (this varies based on the year you were born) can receive their full Social Security benefits, no matter what their earnings are.

Even if you begin receiving Social Security before reaching full retirement age, you can earn up to a certain amount and still receive benefits.

Save more now so you can spend more later

This is hard. It's also common sense. Americans have shockingly low savings rates, shockingly high debt, and an alarming tendency to overspend.

Don't forget to reevaluate your situation every three to five years

Review periodically!

Summary of evaluating your retirement portfolio

Start as early as you can to see whether you're on track to the retirement of your dreams.

If you haven't done so, do it now. You may find you're doing better than you'd thought (or feared).

If you find that you aren't on track, hopefully you still have time to make whatever changes will bring a dream retirement closer.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Retirement planning section

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