New Year's 2016: Where's Your Retirement?

Imagine yourself 10 years ago, sitting in front of your television. Except instead of watching Home Improvement or Melrose Place or Monday Night Football with Al Michaels, Frank Gifford, Dan Dierdorf, and Lynn Swann, you're watching a broadcast of your life a decade later -- in 2006. There you are on the screen, wearing the clothes you're wearing now, working at the job you have now, going through the mail you receive now, doing the things you do now.

How would your 1996 self feel about where you are today? You might think, "Wow, I finally lost that weight!" or "Who stole my hair?" You might marvel at how the Internet has taken over your life or how Starbucks has taken over the world. You might be mildly happy to learn that the Standard & Poor's 500 doubled over that decade -- no great shakes, but better than some expected. (In 1996, Yale professor Robert Shiller, the eventual author of Irrational Exuberance, wrote, "It appears that long-run investors should stay out of the market for the next decade.") And you'd be positively giddy at the market value of your house.

But then ask yourself this: How much closer are you to retirement? Of course, you're a decade closer to retirement age -- but are you significantly closer to being able to pay for retirement?

If so, congratulations! What did you do that worked? What has happened over the past 10 years that has put you ahead?

If you're not, don't spend too much time wailing and gnashing your teeth. This article isn't about wallowing in retirement pity. It's about doing what you can right now so that your next decade will be the decade upon which your retirement will be built.

Where will you be in 10 years?
Now imagine yourself sitting down in front of the TV tonight, but instead of watching Desperate Housewives or Lost or Monday Night Football's final broadcast on ABC, you're watching the 2016 version of your life. That's right: How, where, and how well will you be living a decade hence? And, more to the point, how much closer will you be to retirement?

As one wise person said and many more have plagiarized (since the quote is attributed to everyone from Confucius to Yogi Berra), "It is difficult to make predictions, particularly about the future." But we actually can get a good idea of what your retirement prospects could look like 10 years from now. Here's how you start:

1. Project what you have now.
Estimate how much you've saved so far for retirement, and plug some numbers into our online calculators. For example, if you have $100,000 sitting in your 401(k) and IRAs, input that amount and an assumed rate of return (e.g., 8%) into the "How much will my savings be worth?" calculator, and you'll see that your nest egg could be worth more than $220,000 in a decade. (Put zeroes in the taxes and inflation fields if your money is in tax-advantaged accounts and you want the results in today's dollars, i.e., not adjusted for inflation.)

That's just the money you have now. What would 2016 look like if you add to your retirement savings? That's easy to approximate, too. All you have to do is ...

2. Add in additional savings.
On the very same calculator, you can factor in the contributions you make to your investment accounts. If you start with $100,000 as in our previous example, and you're contributing $500 a month to your retirement plan, then that $100,000 could grow to more than $300,000 in a decade (again assuming 8% annual returns). Not bad. Not bad at all.

But that's saving just $6,000 a year. What if you maxed out your retirement accounts each year? For 2006, the contribution limits to 401(k), 403(b), and 457 plans increase from $14,000 to $15,000. Plus, the "catch-up" contribution limit for workers age 50 or older jumps from $4,000 to $5,000. Contribution limits to IRAs stays at $4,000 in 2006, but the catch-up contribution limit increases from $500 to $1,000.

What could 2016 look like for your nest egg if for the next decade you deposited the current maximum every year into your retirement accounts? The table below estimates the possibilities, again starting with $100,000 but assuming different contribution amounts and rates of return.

Retirement 2016

Wow -- it almost makes you want to jump ahead to 2016 right now. And don't forget that contributing thousands more to your retirement accounts may not be as hard as it sounds, since deposits to employer-sponsored plans and deductible IRAs significantly lower your tax bill, and you might receive a match in your plan at work.

3. Contemplate better returns.
As the chart above indicates, saving more now is a solid strategy for creating a better retirement for yourself, but getting more investment bang from your bucks also works wonders. The compound average annual return of large-cap stocks since 1926 is around 10%, but you're not going to find too many investor luminaries -- from Vanguard founder John Bogle to Berkshire Hathaway chairman and CEO Warren Buffett -- expecting double-digit returns from the overall stock market for the next several years.

Nope, for those types of returns you'll have to beat the market. It's not easy, but it's possible. The ideas offered by each of The Motley Fool's investment newsletters are on average beating the market. My own Rule Your Retirement service features contributions from the other Foolish newsletter editors as well as outside money managers, and a recent review found that the average investment idea is beating its respective index. Mix market-beating returns with higher contributions to your retirement accounts, and that TV show of your future self is looking like a hit.

The three-legged stool has termites
Will your retirement plan circa 2016 rely just on how much you can save and invest between now and then? In one word: mostly.

We've all heard that our retirements will rest upon the proverbial three-legged stool: personal savings, Social Security, and traditional pensions. But those last two have some serious financial problems, and factoring them into your retirement plans can be tricky. Fewer and fewer companies are offering defined-benefit plans, and many that are have plans to make changes. Consider this from a recent USA Today article: "An August survey by PricewaterhouseCoopers showed that nearly half of companies that expect to change their pension plans in the next year are considering freezing benefits for all employees. More than a third that offered pensions have already pared back these benefits over the past three years."

Companies such as Sears, Hewlett-Packard (NYSE:HPQ), and Verizon (NYSE:VZ) have scaled back their pensions. But at least folks who work(ed) for those companies have a plan that's still operating (for now). The Pension Benefit Guaranty Corporation, the government-sponsored entity that insures pension benefits, assumed 120 failed plans in its most recent fiscal year. The PBGC now sends checks to 1.3 million former employees of companies with bankrupt plans. And while that insurance might bring some peace of mind, the check the PBGC sends out is often smaller than the one a retiree would have received from the plan. Plus, the PBGC itself is operating with a $22.8 billion (and growing) deficit. So unless your defined-benefit plan is sponsored by a fiscally sound cash generator such as General Electric (NYSE:GE) or the federal government, you'll have to keep close tabs on the plan's health and decide how much you can factor it into your retirement plan.

As for Social Security, the most recent report from the program's trustees estimate that just a little more than 10 years -- that is, in 2017 -- Social Security will begin paying out more than it takes in. From there, the trust funds will have to make up the difference. Now, I don't want to get into whether there's actually any money in those trust funds, and whether Social Security qualifies as a "crisis." But the fact remains that younger workers -- those 50 and below -- will most likely see reduced benefits or increased payroll taxes in their future.

2016 is up to you
So what will your retirement prospects look like 10 years from now? Will your 2016 self be thankful for everything you did in 2006? It's up to you. Now is the time to make sure that your life will be many times better over the next decade.

Happy New Year! The Motley Fool takes a look in its crystal ball to bring you the future today. Click here to read more about New Year's 2016!

Robert Brokamp is the editor of The Motley Fool's Rule Your Retirement newsletter service. Sign up for an annual subscription now and receive our Stocks 2006, our annual "Investor's Guide to the Year Ahead," free.