Want a greater lifestyle in retirement? The trick is simple — and shocking.

Don’t be too laborious on your self for pondering the right reply is the primary one, since virtually everybody makes this identical mistake. But better-than-average market returns make a surprisingly small distinction, in keeping with the Vanguard Retirement Readiness Model (VRRM), a brand new and proprietary mannequin that Vanguard lately created. The VRRM calculates what Vanguard calls the “sustainable replacement rate,” which is “the percentage of preretirement income that a worker can replace throughout retirement in 90% of market and mortality scenarios.”

Consider a employee whose preretirement revenue is on the 50^th percentile of the nationwide revenue distribution. Given how a lot this median employee has saved and invested for retirement, and assuming that shares, bonds and inflation are nearly as good or dangerous as up to now, and the employee depends on conventional sources of retirement financing (401(okay)s, IRAs, pensions, and Social Security), his sustainable alternative charge (SRR) is 50%. In different phrases, in 90% of market return situations, this employee in his retirement years can safely rely on with the ability to spend a minimum of 50% of his preretirement revenue.

That’s far in need of the 83% that Vanguard estimates this employee in retirement would want to take care of his preretirement lifestyle. To discover what might enhance this median employee’s probabilities of sustaining his preretirement lifestyle, Vanguard measured the influence of modifications in three areas. These are the three choices listed in my pop quiz above.

Improved market returns. Vanguard arrived at a 50% SRR for the median employee by assuming Vanguard’s projected capital market returns in coming a long time. To measure the influence of a extra optimistic situation, Vanguard assumed that future returns might be on the 75^th percentile {of professional} forecasters projections. Believe it or not, that improved the SRR by simply 1 proportion level. In distinction, the SRR fell by simply 2 proportion factors beneath a pessimistic situation wherein future returns are on the 25^th percentile of forecasters projections. In different phrases, relative to a pessimistic situation, an optimistic situation for future market returns will increase the SRR by simply 3 proportion factors.

Accessing dwelling fairness. Vanguard subsequent estimated the influence of permitting the retiree to complement his retirement revenue by accessing dwelling fairness, both through utilizing a reverse mortgage or by promoting and transferring to a lower-cost housing market. This elevated the SRR for the median employee by simply 4 proportion factors.

Working longer. Working longer doubtlessly improves the SRR in 4 methods. It will increase the variety of years wherein the employee is contributing to his retirement portfolio, it will increase the variety of years wherein that portfolio may be incomes a return, it reduces the variety of years that funds must be withdrawn from that portfolio, and it will increase the month-to-month payout from Social Security. So it shouldn’t be a shock that working longer makes an enormous distinction to a median employee’s SRR. Working only one 12 months longer will increase the median employee’s SRR by 3 proportion factors, in keeping with Vanguard. And ready 5 years to retire—to age 70 relatively than the 65 assumed by the VRRM—will increase it by considerably greater than 15 proportion factors.

Why does Vanguard’s “optimistic” market situation make such a small distinction to the median employee’s SRR? The reply is that the median employee has comparatively little invested in his retirement portfolio to start with, and has comparatively little of that portfolio allotted to equities.

Better-than-average capital market returns have the most important influence just for the highest-income employees, since they’ve the biggest retirement portfolios and essentially the most allotted to equities. But Vanguard initiatives that such employees in retirement might be greater than in a position to maintain their preretirement lifestyle, even with out assuming the “optimistic” situation for future capital market returns.

The backside line? You in all probability are exaggerating how rather more you’ll should spend in retirement if the markets go your means.

The most surefire means of bettering your retirement lifestyle is working longer.

Mark Hulbert is an everyday contributor to MarketWatch. His Hulbert Ratings tracks funding newsletters that pay a flat price to be audited. He may be reached at mark@hulbertratings.com.