Formulas can be perplexing, and calculators might seem daunting — but take heart, you could be faring better than you realize.
In mid-2017, I shared on Twitter a series of benchmarks that can assist in determining if you're on course for retirement. These guidelines suggest: by age 30, aim to have saved an amount equal to your income; by 40, three times that amount; by 50, six times; by 60, eight times; and by retirement, ten times your income. Developed by a well-known firm, these guidelines aren’t unique. What was notable was the viral response on Twitter. Some users found these benchmarks amusingly unrealistic, while others appreciated them. Why? Because they provide clarity to a common concern: Am I setting aside enough for retirement?
This question is one of four major aspects we’re addressing in our initiative. In the coming month, we’ll explore how long your savings will last, whether you can maintain your lifestyle, and ways to safeguard your savings.
The answer to your question varies by individual circumstances. The EBRI Retirement Security Projection Model indicates that 40% of individuals aged 35 to 64 may face challenges meeting retirement costs. Similarly, the National Retirement Risk Index shows that half the population might not have enough to sustain their current living standards in retirement. Yet, according to Annamaria Lusardi, a professor of economics, “Retirement can often be less expensive than your working life.” You might not need to support children anymore, or perhaps downsizing could be beneficial.
The key takeaway is: there’s no one-size-fits-all approach. Here are some pointers to assess if you’re saving adequately.
It’s not just retirement, it’s your retirement.
What does your retirement envision? If you haven’t contemplated this yet — possibly with your partner — now’s the time. Understanding your vision helps in estimating costs. Questions arise about your living situation (staying in a larger home or moving to a smaller one), employment status (will you work during retirement?), and relocation (could this impact taxes?). The timing of your retirement is also critical. Continuing to work longer gives your savings more time to grow and reduces the years you depend on your retirement funds. Once you’ve answered these questions, grab a pen and paper and calculate your expected living costs. If you find it challenging, consulting a financial advisor might be wise.
Focus on replacing your income.
After grasping your financial picture, you can strategize on how to achieve your goals. Start with Social Security — how much will it cover of your monthly expenses? (Visit SocialSecurity.gov for estimates.) While many claim benefits at 62, waiting until 70 can increase monthly benefits by approximately 8% for each year you delay. Subtract that from your living expenses. If applicable, account for any pension income as well. Most Americans lack pensions today, but some military families may receive them. Deduct your pension from your monthly requirements. What remains is what you’ll need to fund through retirement savings. “Following the 4% safe withdrawal rule, a million-dollar portfolio yields about $40,000 annually,” states David Littell, a retirement income professor. You might need more or less.
Prioritize your savings rate over lofty targets.
Noticing a shortfall in your savings can be disheartening — as my Twitter experience illustrated. Instead of fixating on that daunting total, shift your focus to your savings rate. Aim to gradually increase it, suggests Littell. Consistently saving about 15% of your income, including employer matches, is often sufficient throughout your career. If you’re starting late or are behind, increase your rate by 2%. Maintain that for six months before bumping it up again. Ensure automatic transfers to your retirement account with each paycheck. If your job doesn’t facilitate this, consider setting up automatic deposits into an IRA independently. “Progress at your own speed is fine,” Lusardi notes. “Just ensure you’re making progress.”
Don’t let a late start deter you from beginning.
Finally, if you haven’t started saving yet, don’t let hesitation prevent you from beginning, Lusardi advises. “Achieving small milestones throughout your saving journey can boost your confidence, encouraging you to keep contributing.”
For more guidance, consider a complimentary retirement review by calling 1-800-531-3392.
