Consider these steps to stress-test your retirement kitty's sustainability.
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By Christine Benz | 02-16-11 | 06:00 AM | Email Article

Current and future retirees have some important advantages over folks who retired even a few decades ago. Due to advances in medicine and healthier lifestyles, a person retiring at age 65 today can and should plan for 20 or more relatively healthy years.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

But with improved longevity comes challenges. Given very long time horizons and the fact that the majority of today's retirees don't have pensions, the risk of a retiree outliving his or her nest egg is a very real one.

So how can you tell if your retirement portfolio is on the right track to sustain you for the rest of your life? Here are the key steps to take.

1. Estimate income needs.
The first step when gauging your retirement portfolio's sustainability is to estimate your in-retirement income needs. (This will obviously be easier for those who are closer to retirement than it is for younger savers for whom retirement is 20 or 30 years in the future.) 

As you do so, be realistic about what you'll actually spend. Conventional wisdom had been that retirees will spend about 80% of their pre-retirement expenditures, owing to savings in categories like commuting, lunches out, and not having to save for retirement any more. In reality, some retirees actually spend more than they did when they were working, owing to big-ticket costs like travel and medical bills. Others, meanwhile, spend a lot less. Read this thread for guidance on how other retirees and pre-retirees are estimating their income-replacement needs for their retirement years.

2. Estimate longevity.
How long does your portfolio need to last? Who knows? But it's better to plan for a good long life rather than risk falling short and becoming a burden on your loved ones. Use the Social Security Administration's life-expectancy calculator to find the average life expectancy for someone of your age, or use a longevity calculator such as this one for fine-tuning based on your own health and lifestyle.

3. Gauge certain sources of retirement income.
The next step when determining your retirement portfolio's viability is to round up any income you're expecting from sources other than your own retirement savings, including Social Security, part-time work, pensions, and annuities.

For a specific read on what you can expect from Social Security, use the Retirement Estimator calculator on the Social Security Administration's website. Alternatively, you can submit a request for a personalized Social Security statement using the guidelines outlined here. Bear in mind that the amount of your Social Security income will depend on when you begin collecting; this article lays out some of the key variables.

If your Social Security benefits seem too skimpy, they might be. Not reporting name changes, 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.

Projecting what your retirement or pension plan will provide requires more legwork. First, know the factors 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 runaround, turn to Washington. Call the Pension and Welfare Benefits Administration (800-998-7542) to find the Department of Labor office in your area. This article provides details on how to check up on the health of a pension.

4. Find the size and asset allocation of your retirement portfolio. 
Now it's time to get a current read on your investment portfolio. Gather up your most recent statements for all of the assets you have earmarked for retirement--IRAs, company retirement plans, and taxable accounts.

Enter each of those holdings into Morningstar's Instant X-Ray tool. (If you can't find an exact match for one or more of your holdings, this article details some workarounds.) Take note of your aggregate retirement savings amount (the total dollar value of portfolio), then click Show Instant X-Ray. Jot down how much you have in stocks, bonds, and cash. 

5. Determine whether your current portfolio will support your desired level of income.
Armed with these key pieces of information--your expected income needs and longevity, your portfolio size and asset allocation, and your expected income from other sources--you'll be able to make a reasonable judgment about your portfolio's sustainability.

This article coaches you on putting all of those variables together and also includes a link to a worksheet that helps you determine if your planned spending rate is reasonable.

For a more precise read on the viability of your retirement calculator, turn to an online tool such as  Morningstar's Asset Allocator and T. Rowe Price's retirement income calculator. (If you save your portfolio on, Asset Allocator can use your actual holdings in the calculation.) Just bear in mind that such tools may factor in overly rosy market-return expectations, as I discussed in this article.

6. Make necessary adjustments.
Does your retirement portfolio appear to be on track? If so, give yourself a pat on the back and stick with your savings program; you're obviously doing something right.

But if it looks likely that you'll fall short, you'll have to tweak whatever variables you can--save more, work longer, invest more aggressively, or all of the above. This article discusses some of the key ways in which pre-retirees can improve their portfolios' longevity if it looks like they'll run into a shortfall.

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Morningstar - 2011/02/16 - Will Your Retirement Savings Meet Your Needs? - <a href="">Christine Benz</a>
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