By Professor Pennywise

Note: This is the second piece in Professor Pennywise's "Investing for Retirement" extravaganza, the first of which may be read here.

How do you know if you are on track for retirement?

Because that question is not easily answered, it is one that lurks beneath the anxiety of many Pennywise readers who wonder if they will ever be able to retire. Just a few weeks ago, a professor at a Roman Catholic college in Michigan posed a variant of the question in response to Pennywise's initial column on retirement saving: "The average person has only $66,900 in retirement investments? I have $300,000, and my wife, also an academic, has $230,000. I'm 54, she's 47, so retirement is still a ways off, but I've been fretting that we'll starve when retirement comes. Oh, yes, we scrimp to make double payments on our mortgage to get rid of that beast. Am I worrying for nothing?"

Let me begin with a clarification. Last month I relayed news of a study finding that the average 401(k) balance is $66,900. I apologize if that created a misimpression. It does not necessarily follow that the average person has saved only that much for retirement. People may, of course, have more than one 401(k) account, especially if they do not know they can roll over their accounts when leaving an employer. Additionally, plain-vanilla savings accounts, IRA's, real estate, and other assets are not included in this figure. While the typical 401(k) balance may be $66,900, the average person may well have larger retirement assets. These things are difficult to gauge.

That said, America does seem to be careening toward a retirement crisis. Study after study finds that many Americans have no retirement savings at all, making them fodder for the ranks of 78-year-old Wal-Mart greeters and Wendy's cashiers. An even larger proportion has some savings but is not on track to a satisfactory level of financial security in retirement.

As the reader's question demonstrates, the resultant unease extends even to academe, where pensions, job security, and benefits were traditionally relatively generous. Now, however, adjunctification has taken a steady toll, and even tenure-track faculty members typically start out in their 30s, making it harder to accumulate savings. Hence this continuing Pennywise series on retirement-savings strategies.

One potential way to determine whether you are on track is to run some numbers. After all, retirement savings is a numbers game—put away enough, manage it so that it performs well enough, and then you will be able to draw down enough.

So how much is enough?

Let's take the worried reader above as a case study. Pennywise projects an ample retirement for the couple. How did I arrive at that judgment? By consulting a nifty retirement-savings calculator at T. Rowe Price. I guesstimated that the reader makes $50,000 a year, and his wife $40,000, based on the extent of their savings. I assumed that they save about 15 percent of their income and have a 50-50 allocation of stocks and bonds that will shift to 40-60 in retirement. Based upon that and an anticipated Social Security payment, the calculator indicates that the couple, in retirement, is likely to be able to draw down an amount equal to just a bit more than 77 percent of their present income. That should be plenty, given a paid-off mortgage and the obvious fact that once in retirement there will be no further need to set aside 15 percent for retirement every month. Starvation? Unlikely, thankfully.

I have made a lot of assumptions here about income and asset allocation. I freely admit that they may not reflect reality for the couple in question. This exercise is not meant to illustrate any particular set of circumstances so much as to show the utility of retirement calculators for self-assessment. If you make use of a retirement calculator from time to time along your career path, you'll gain a clearer sense of whether you are in desperate need of increasing your savings rate or whether you are making a fairly reasonable rate of progress along your intended path.

T. Rowe Price's retirement calculator is a decent enough place to start, although others—all free, and each configured a little differently—may be found at Vanguard, MSN, Bloomberg, and Calculator.net, among other Web sites. Some of those calculators allow you to affix a numerical end goal—say $1.2 million—to your savings objectives.

The problem with all of this number-crunching, however, is that the calculations are ultimately conjectural. The reason uncertainty and anxiety persist over how much to save for retirement is that so many of the variables that these projections require are, in the end, indeterminable.

Please tell me, for example: What will the average rate of inflation be between now and three decades hence? At what rate will your salary increase? How generous will Social Security be? What will be the rate of return on stocks? Bonds? Will global warming, economic crises, the national debt, or some other factor affect markets adversely? What if new inventions, such as a cure for cancer or a new means of cheap, sustainable energy, spark entirely unanticipated economic booms? What if a catastrophic world war breaks out between China and the West? What will U.S. tax rates be when you retire? What state will you be living in? What will your precise asset allocation be? Will your expenses go up in retirement—because, say, you want to travel—or go down? Will your health hold up, or will you or your partner require costly long-term care?

Let's face it: It's a giant crap shoot. Numbers may imply a deceptive certitude, but by its very nature the process of saving for retirement is a matter of guesswork. That does not make the exercise of running calculations meaningless; on the contrary, using a calculator can be highly instructive. But use such calculators only as very loose indicators of whether you are making suitable progress. Don't imbue them with a predictive power they simply can't have.

The way to offset the limitations of such a planning exercise is to build in a healthy margin of safety: Simply put, save more than the calculator requires of you—if possible, a good deal more. At a minimum, take the full match in your tax-advantaged, employer-based retirement account. Then go further.

Most retirement experts would advise a savings rate in the range of 12 to 15 percent annually across a lifetime. Pennywise, personally, aspires to save in the 20-percent range, if at all possible in a given year. Much depends on when you begin saving, since long-term horizons are hugely advantageous in investing. People in their 50s who are acutely short of their goal need to save something in the range of 30 percent of their income, if not more. People in their 20s might save a lot less and come out in the same shape.

Saving for retirement is a bit like studying for a test. Just as regular study of the course material throughout the term will enhance performance, so regularity of savings will enhance performance. Better to save too much than too little. But the key is regular saving. With diligence and perseverance, a perfectly adequate, and possibly even opulent, retirement should be well within your reach.

Professor Pennywise, who writes Academic Assets monthly, is the pseudonym of a humanities professor who has taught from the Pac-10 to the Big Ten and is not a financial professional, merely a frugal academic. Comments, suggestions, and questions for future columns may be sent to professorpennywise@yahoo.com.