With Retirement Savings, It's a Sprint to the Finish

What would you do if your financial planner prescribed the following advice? Save and invest diligently for 30 years, then cross your fingers and pray your investments will double over the last decade before you retire.

The problem is that even if you do everything right and save at a respectable rate, you're still relying on the market to push you to the finish line in the last decade before retirement. Why? Consider the numbers for a 26-year-old who earns $40,000 annually, with a long-term savings target of $1 million. To get there, she's told to save 8 percent of her salary each year over her 40-year career. (We assumed an annual investment return of 7 percent, and 3 percent annual salary growth, to keep pace with inflation). Yet after 31 years of diligent savings, her portfolio is worth just slightly more than $483,000.

Should the markets misbehave, however, delivering a mere 2 percent return over the 10 years before retirement (not all that hard to imagine, considering the return of a portfolio split between stock and bonds over the last decade), she falls short by about a third. The chart accompanying this column illustrates this.

So if your target is to save $500,000 or $2 million, and if you assume a 6 percent return or a higher 10 percent, you're still relying on your investments to roughly double in the final years before retirement.

Of course, an extended period of dismal returns during any point in your career can inflict damage. So what's an investor to do about all of this, especially as one of the other pillars of retirement savings — pensions — disappears? And who's to say how Social Security may change by the time that 26-year-old retires?

If you can't handle the uncertainty of missing your financial targets, you can try to save more and create a less volatile portfolio, Mr. Kitces says, which may also provide a firmer retirement date.

Then you can end up in the same predicament, where you are heavily leaning on market returns in the years before retirement.

When you've won the game, you stop playing the game."

"It's the cruel irony of retirement planning that those people who most need the markets' help have the least financial capacity to take the risk," said Milo Benningfield, a financial planner in San Francisco. Try using different assumptions for the years leading up to retirement, suggests Scott Hanson, a financial planner at Hanson McClain in Sacramento. If you want to retire in 25 years, for instance, you might use a return assumption of 8 percent for the first 15 years of savings, then reduce that rate to 6 percent or less in the final decade, he says.

"Here's the catch: most folks aren't saving enough using standard growth assumptions," he said.