How To Know If Your Retirement Savings Are On Track
By Lyle Solomon, Next Avenue
As you save for retirement, it’s beneficial to know how much to save and whether you’re on the right track. Everyone’s situation is different, of course, but there are some useful retirement benchmarks that can give you a sense of how you’re doing to reach your goals.
After comparing your numbers to the benchmarks, you can then work on making any necessary adjustments and then check your progress regularly.
To set your retirement savings benchmark, you need to consider two factors — how much you’ve already saved for retirement and your current age. Then, compare your savings against your current gross income to begin setting savings goals based on your income.
What is a good retirement savings goal? Many financial institutions and experts have a few guidelines to help answer that question.
Retirement Savings Guidelines
Fidelity Investments, for example, has created the following set of benchmarks based on ages for people in their 50s and 60s:
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Similarly, T. Rowe Price has developed its savings benchmarks and J.P. Morgan has created “retirement savings checkpoints.”
Another benchmark concept: aim to replace nearly 80% of your current annual income in retirement so you can maintain your lifestyle once you retire.
Of course, the big unknowable is how long will you live and how long should your savings last? For a guesstimate, try using the Social Security Administration’s Life Expectancy Calculator. Here’s an example using the 85% rule and life expectancy estimates:
Say you were born in 1970 (you’re now 51) and want to retire at 67, so you will retire in 2037. And let’s assume your annual income is $40,000. If you expect to live for 20 more years after retiring, you’ll need ($32,000 x 20) = $640,000 in retirement savings.
The 4% Rule for Retirement Withdrawals
Another widely used benchmark, to help you determine how much of your retirement savings you can afford to withdraw each year in retirement, is “The 4% Rule.” As the name indicates, it suggests that you withdraw 4% of your retirement balance annually (adjust for inflation each year after the second year).
For example, if you have $1 million in retirement savings, you’d withdraw $40,000 in year one and from the second year on, it would be $40,000 plus inflation.
For years, the 4% rule has been considered an excellent ballpark to help ensure retirement funds will last approximately 30 years.
But lately, financial experts such as Wade Pfau, a professor of retirement income at the American College of Financial Services CBFV , say this rule needs tweaking because of today’s low interest rates and the possibility of inflation.
At a 4% withdrawal rate, they note, you could run out of money in 30 years. Instead, they recommend more like 3% a year under current economic conditions.
David Blanchett, the head of retirement research at Morningstar Investment Management, said on CNBC: “3 percent is the new 4 percent.”
Allan Roth, a certified financial planner at the Colorado Springs, Colo. advisory firm Wealth Logic, believes in the 3% rule, too. And, he has said, “There are many other factors built into low-risk withdrawal rates. Age, health, life expectancy and the amount of guaranteed monthly income from sources like Social Security and pensions are also important considerations.”
Some financial advisers also say the 4% rule may be too risky for some people because it assumes you’ll hold a portfolio of 50% in stocks and 50% in Treasury securities.
The 3 A’s of Retirement Savings
When determining how much you need to save, it also helps to consider the 3 A’s of retirement savings:
- Amount: Experts suggest saving at least 15% of your pre-tax income annually, if you can
- Account: Factor in your other sources of retirement income, such as Social Security benefits, employer pensions, investment and retirement accounts such as 401(k)s and IRAs and any part-time employment earnings
- Asset mix: The higher the percentage of your retirement savings in stocks, historically speaking, the higher your portfolio’s rate of return will be
If, after aiming for these benchmarks, you discover you’re not on track, don’t lose hope either. Focus on what you can do to help get back up to speed. That might mean revving up your annual savings, opening or funding a retirement account, investing less conservatively or using a Health Savings Account to save for retirement and for medical costs.
Hiring a good financial adviser could be useful, too. That professional can show you ways to get on track and work with you to keep at it.