In the recent film smash “Avengers: Infinity War,” superhero Doctor Strange analyzes more than 14 million possible futures to figure out how to defeat the evil Thanos and save humanity.
Well, he has nothing on Stephen Wendel.
Wendel, head of behavioral science for Chicago-based investment research firm Morningstar, looked at more like 400 million possible futures for his white paper “Easing the Retirement Crisis."
The planning simulations - using almost 4,000 real families - took six months to run through a gigantic computing platform. The goal: Figure out what specific financial behaviors will get you where you need to be, and which do not work.
Step one in this time-traveling exercise was to admit where we are in terms of retirement savings, in order to figure out where we need to go. The picture is not pretty.
“We even used very optimistic assumptions, such as that Social Security would be fully funded and that people’s pensions would still be there,” said Wendel. “Even then, only about a quarter of working households are on track to have what they need in retirement.”
That dire news assumes a decent stock market. If you figure that the stock market has below-average years ahead, then the 25 percent number of retirement-ready households drops to 18.5 percent. Even worse: If Social Security falters, the number tanks to 9 percent.
There are eight different “levers” you can work to alter your retirement outlook, Wendel's research found. These are actions like saving more, spending less, delaying retirement, boosting your equity exposure, chasing higher returns and so on.
If you choose just one, you have to get pretty extreme, like slashing your standard of living to 40 percent of your pre-retirement salary, for instance, rather than the standard 80 percent. Or you could delay your retirement age by a full decade.
If you combine multiple strategies, you can have more modest-but-achievable progress, Wendel said. Unlike "Infinity War," which comes down to only one possible solution, with these 400 million retirement scenarios there are many ways out.
For instance, if households saved a minimum of 6 percent a year, and delayed retirement by just a couple of years until age 67, the effect is dramatic. The current 25 percent of households that would be okay in retirement shoots up to 71 percent, according to Wendel's Morningstar data.
While retirement readiness is ultimately a personal mission, employers could help out, too: “The most common default for retirement savings in workplace plans is still 3 percent,” said Wendel. “Everybody in the industry knows this is woefully low.”
A better starting point for 401(k) plans that would automatically place most Americans on a much better retirement path is 6 percent, Wendel noted.
Some other levers, by the way, are not as effective, the study found. So do not obsess about things like getting your allocation perfect or trying to chase better returns, which are not going to move the needle all that much. Instead focus on the big guns in your arsenal like saving more, spending less and working longer.
That holds true across all age categories, by the way. Even for older, mass-affluent households, who are coming to the end of their contribution years, asset allocation is still the least impactful lever.
"You don’t have to do anything really extreme to get back on the right track. You just have to make multiple small changes,” said Wendel.