At the end of each quarter, many of us receive our latest retirement statement. We take a quick glance to see the bottom line and how our accounts have done over the last three months—the difficulty we see for many investors is, after looking at those balances, there’s no frame of reference. Most have a hard time figuring out if they are on the right path. They default to the defeatist attitude that since retirement is 15-20-25 years away, there’s really no point in analyzing their current situation. We disagree wholeheartedly with this mindset, and strongly encourage folks to assess their current retirement balances, regardless of how young or old you may be.
We get this question quite often: ”How much should I have in retirement at “my” age?”, especially from younger investors. Another variation is “What do most folks “my” age have saved?”, as if someone else’s financial situation has any bearing on their own. Our knee-jerk reaction is always “the more the better!” Googling the answer will give you a myriad of answers, and the reality is, as one approaches retirement, it really will depend on that person’s specific situation. However, one way to start thinking about “have I saved enough?” is to compare your current balance to your current salary. The basic premise is that if you are comfortable with your current lifestyle, how much savings do you need to support that lifestyle once you reach retirement?
One of the most quoted guidelines we see suggests using the following guideposts:
At age 35: 1x your salary ($65,000 salary=$65,000 saved specifically for retirement)
At age 45: 3x your salary ($100,000 salary= $300,000 saved for retirement)
At age 55: 5x your salary ($125,000 salary=$625,000 saved for retirement)
Finally at age 67: 8x your final salary is recommended
*Source: Fidelity.com: https://www.fidelity.com/viewpoints/retirement/how-much-money-do-i-need-to-retire
The beauty of this methodology is in the simplicity. For younger investors, we can’t praise the KISS (Keep It Simple, Stupid) method enough. Folks in their 30‘s and 40‘s can use these guidelines to get a gauge of where they are and it gives them goals to try and hit along the way to retirement. A common refrain from younger folks is “I’ll never be able to retire” and they seem to give up seriously trying. They may save in their 401k to get their company match or to fund their ROTH IRA’s, but they really aren’t sure they are doing enough. The reality is they are struggling to define their goals and how to determine if they are achieving them. While a financial advisor can work with you to determine more specific goals (college saving, retirement planning, addressing debt), if you are not ready to take that step, these guidelines help quantify goals to achieve as you progress towards retirement. For these investors, they are far better than no plans at all. In fact, these rudimentary goals based on age may start to lessen the blow of how much you need to save as your career progresses.
If you sit down and do the math and you find yourself behind, we suggest trying to save until it hurts. Save until that new purchase, whatever it may be, causes you to pause and think “can I afford this?” or “do I really need this right now?” Clearly we don’t suggest saving over reducing credit card debt or over extending yourself, but there is a middle ground. If you think you can’t possibly save anymore then you already are, perhaps it’s time to sit down and create a budget. Many folks would be amazed at where their monthly budget all goes (I’m looking at you, ridiculously high cable bill!) Saving an extra $100 a month, for 30 years at 6% return, would net an investor over $100,000 in retirement.
For those investors who see retirement perhaps 10 or 15 years away, these guidelines are probably too generic. They may be great starting points for discussion, but they really should be personalized. At the point where retirement is that close, it is a little easier for you to determine what your final salary could be, AND more importantly what your expenses will be in retirement. This is the challenge with younger investors. Their life will have so many twists and turns that it becomes an exercise in futility to try and guess what their retirement will really look like. A 40 year-old has no idea what their expenses will be, where they will be living and what sort of income they will need, whereas a 60 year-old couple probably has a decent idea of what their needs and what their savings will be to meet those needs. As always, if you are struggling to determine if you are on track, or just need a second opinion we recommend seeking professional help. A financial advisor will be able to sit with you and gauge if you’ve saved enough, what your expenses may look like and if you can afford to retire.
If you’re just starting to get serious about retirement, and have no idea if you are on the right path start with these guidelines, assess how much you’re saving and see if you can squeeze some extra money from your budget. If you’re in between those ages above, do some quick math, come up with a goal and see what you need to do to achieve in the next year, and then next year don’t forget to review it! Hope is not a viable retirement planning strategy, but with a little effort and a specific plan you may find yourself on the right path far sooner than you thought.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or of our parent company, Focus Financial Partners. LLC. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.