At one time or another most people ask themselves "When am I going to be able to retire?" or "How am I doing relative to my retirement goals?" or something similar. These are reasonable questions but not necessarily the easiest ones to answer.

One of the common ways people go about making this assessment is to set a target for an amount of money that should be accumulated by their retirement date. People determine their "number" in a variety of ways, but not always based on sound financial concepts. If the rate of growth required between today and the target amount of retirement is reasonable, they feel they are on track.

In a November 2010 blog post, Michael Kitces asked how many financial advisors would tell their clients that the plan was to save for decades, build a base, and then in the last few years, quickly double up your wealth with investment growth and retire happily? He then explained why that is precisely what many are actually doing. Take the simple example of someone wanting to accumulate $1 million over a 40-year working career. This would require about $300 a month in savings, assuming an 8% compounding rate. At that rate, after 30 years this person still won't be even halfway to the million dollar goal, having accumulated less than $450,000.

Financial planners have largely gotten away from deterministic models whereby saving X number of dollars for Y number of years earning some percentage will result in reaching a target. Such a model is overly simplistic and unrealistic given market volatility. Stochastic modeling has become more prevalent and while stochastic modeling can give us a more robust view of possible outcomes, it doesn't eliminate the uncertainty that comes with zeroing in on a specific target.

Kitces' post was not about stochastic versus deterministic modeling. His primary admonition was that we should acknowledge "... how remarkably uncertain the actual retirement date will be." Modeling merely describes possible outcomes. Markets and investor behavior determine actual outcomes.

In prior articles, I have discussed Professor Wade Pfau's work regarding the concept of a safe savings rate. He determined how much one needed to save over a working career to reach an amount that would allow for an initial withdrawal rate of 4% at retirement. However, looking through the retirement date to consider one's entire possible lifespan, Pfau found that the minimum savings rate required to fund a retirement was far more stable than the savings rate required to hit a target accumulation amount. These findings got Pfau curious about assessing one's progress toward retirement.

In an October 2011 Journal of Financial Planning article (subscriptions and archives free for members of the Financial Planning Association), Pfau presents some fascinating information regarding the uncertainty surrounding whether or not a person is on track to retire. In "Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work," we see some specific examples of the uncertainty Kitces alluded to in this blog post.
Using data going back to 1871 and running through 2010, Professor Pfau charted the compounded annualized five-year return for annually rebalanced 60/40 portfolios. 84% of these five-year periods produced a positive real rate of return. The average was a real return of 5.26%, but the range around that average was substantial. The best result was 19% for the five years starting in 1924 and the worst was -8.5% for the five years starting in 1916.

Digging deeper into the data, Pfau produces an eye-popping chart comparing two individuals, who were chosen because they behaved identically yet one accumulated less wealth over his 30-year working career. Each saved 10% of his constant real salary over 30 years to a 60/40 portfolio rebalanced annually.

In Pfau's words: "In comparing these two individuals, the problem with knowing whether one is on track to meet a wealth accumulation target at a planned retirement date is that neither one of them could have had a clue about their upcoming record-breaking status even five years before their respective retirements." Take a look at just how dramatic the difference has been.


After 21 years of savings, the 1921 retiree and the 2000 retiree had accumulated virtually the same level of wealth. Four years later, only five years before retirement, they are still in similar positions. By the time their retirement dates came, one accumulated less than four times their final salary while the other had nearly 12 times their final salary.

Though the final outcome in this figure is the extreme, the notion that where one is at a given point in time may not be indicative of where that person actually ends up is more the rule than the exception.

Intuitively we would expect a less volatile portfolio to be more predictive of future wealth than a more volatile portfolio. We would also expect that the shorter the time frame, the better we would be able to predict a future portfolio value. Pfau's data confirms this however, it also clearly demonstrates the difference between "more predictive" and actually "predictive."

Pfau compared the amount of wealth accumulated prior to retirement to the amount of wealth at retirement for various portfolio mixes and time intervals ranging from one to 10 years. The results show that a future retiree saving 10% of a constant real salary with a 60/40 portfolio and 10 years to go knows almost nothing about how much he will have at retirement. The R squared between pre-retirement wealth and wealth at retirement date under this scenario was a mere five. Even with just five years to go, the R squared is only 34.

This does not mean that this retiree only has a 34% chance of reaching his goal. It means that there is not a very strong relationship between the exact amount accumulated five years from retirement and the exact amount present at that retirement date. Some of the outcomes were quite favorable.

One of the variables that clients actually control to a great extent is their savings rate. Market volatility can make determining what this rate needs to be challenging. For example, the minimum savings rate was all over the map in the 10 years leading up to retirement for someone who wants to spend 50% of their final salary, adjusted for inflation for 35 years of retirement, from their 60/40 portfolio. According to Pfau, the average needed was 18.9% but there were three periods were no savings were required and a handful where the rate exceeded 50%.

To deal with all this uncertainty, Pfau reframes the issue to present the concept of a "safe retirement age." To do this he considered a 55-year-old wishing to retire on withdrawals from the assets of 50% of final salary and living to be 100. He built a matrix (A below) comparing the amount accumulated as a multiple of salary against various savings rates for a 60/40 portfolio mix and sought out the youngest age at which the portfolios of all such retirees lasted to age 100. He dubbed this the "safe retirement age".

For those that had already accumulated six times their salary at age 55 and were saving 15% of that salary, a retirement that commenced at age 67 or later always succeeded. If the person had accumulated 14 times their salary it has been safe to retire immediately. However those that had accumulated nothing by age 55 and started to save 15% a year could not be certain the money would last if they retired before age 82.

In (B), we see the effect of changing the asset allocation. The 55-year-old with six times their salary saving 15% pushes the worst-case retirement age out three years to age 70 if they reduce their equity exposure to 40% from 60%. However, more aggressive portfolios have minimal impact on shortening the time to retirement. Going from a 60% equity exposure to either 80% or 100% did not change the worst-case age at all. The typical return increased but so did the volatility.

In (C), Pfau explores the effect of different spending scenarios through retirement. The 55-year-old with six times their salary saving 15% into a 60/40 portfolio finds a worst-case age of 73 if 80% of final salary is required to be withdrawn until age 100. One needing only 40% could retire at 64.


People naturally crave certainty but uncertainty is the norm in the markets and in life. Clients are likely to do better if they recognize that the future is uncertain and prepare to adjust to whatever changes come to be. Advisors would be wise when asked, "Am I on track?" to resist giving a definitive "yes" as an answer. 140 years of market behavior indicates it isn't so cut and dry.

Dan Moisand, CFP, has been featured as one of the America's top independent financial advisors by most leading financial advisor publications. He has spoken to advisor groups on five continents on topics such as managing investments and navigating tax complexities for retirees, retirement readiness, and most topics relating to the development of the financial planning profession. He practices in Melbourne, Fla. You can reach him at