Are my retirement savings on track? Try these benchmarks to see how you fare
When saving for retirement, it pays to know how a lot to save and if you’re on the right track. Everyone’s situation is different, of course, but there are some useful retirement benchmarks that can give you an idea of how you’re doing to achieve your goals.
After you have compared your numbers to the benchmarks, you can then work on any necessary adjustments and then check your progress regularly.
To set your benchmark for retirement savings, you need to consider two factors: how much you’ve already saved for retirement and your current age. Then compare your savings to your current gross income to start setting savings goals based on your income.
What is a good retirement savings goal? Many financial institutions and experts have some guidelines to help answer this question.
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Retirement Savings Guidelines
Fidelity Investments, for example, created the following set of benchmarks based on the ages of people in their 50s and 60s:
|Current age||Ideal amount of retirement savings required|
Equivalent to 6 times the annual salary
Equivalent to 7 times annual salary
Equivalent to 8 times annual salary
Equivalent to 10 times annual salary
Another benchmark concept: aim to replace almost 80% of your current annual income in retirement so that you can maintain your lifestyle after retirement.
Of course, the big unknowable is how long will you live and how long should your savings last? For an estimate, try using the Social Security Administration Life Expectancy Calculator. Here’s an example using the 85% rule and life expectancy estimates:
Suppose you were born in 1970 (you are now 51) and want to retire at 67, so you will retire in 2037. And suppose your annual income is $ 40,000. If you plan to live another 20 years after your retirement, you will need ($ 32,000 x 20) = $ 640,000 in retirement savings.
Be sure to read: What inflation means for your retirement
The 4% rule for withdrawals at retirement
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 suggests, this suggests that you withdraw 4% of your retirement balance annually (adjust for inflation each year after the second year).
For example, if you had $ 1 million in retirement savings, you would withdraw $ 40,000 in the first year and from the second year on, that would be $ 40,000 plus inflation.
For years, the 4% rule has been viewed as a great way to ensure that retirement funds will last around 30 years.
But lately financial experts such as Wade Pfau, professor of retirement income at the American College of Financial Services, say this rule needs to be changed due to current low interest rates and the possibility of inflation.
Learn more: Is a sub-fund strategy better than the 4% rule?
At a 4% withdrawal rate, they note, you could run out of money in 30 years. Instead, they instead recommend 3% per year under current economic conditions.
David Blanchett, Head of Retirement Research at Morningstar MORN,
Investment Management, said on CNBC: “3% is the new 4%.”
Allan Roth, a certified financial planner with consultancy firm Wealth Logic in Colorado Springs, Colo., Also believes in the 3% rule. And, he said, “There are many other factors that are built into low risk withdrawal rates. Age, health, life expectancy and the amount of guaranteed monthly income from sources such as social security and pensions are also important considerations. “
Some financial advisers also say that the 4% rule may be too risky for some people because it assumes you have a portfolio of 50% stocks and 50% treasury securities.
The 3 A’s of retirement savings
To figure out how much you need to save, it’s also helpful to consider the 3 As of saving for retirement:
- Amount: Experts suggest saving at least 15% of your pre-tax income each year, if you can
- Account: Consider your other sources of retirement income, such as Social Security benefits, employer pensions, investment and retirement accounts such as 401 (k) and IRA, and any on-time employment income partial
- Asset mix: The higher the percentage of your retirement savings in stocks, the higher the rate of return on your portfolio will be.
If after aiming for these benchmarks you find that you are not on the right track, don’t give up hope either. Focus on what you can do to help get yourself back into high gear. This could mean increasing your annual savings, opening or funding a retirement account, investing less conservatively, or using a health savings account to save for retirement and medical expenses.
Learn more: Get triple the tax benefits with an HSA and find an affordable health plan while you’re at it
Hiring a good financial advisor can also help. This professional can show you how to get started and work with you to get there.
Lyle Solomon is a licensed lawyer in California. He has been affiliated with law firms in California, Nevada and Arizona since 1991. As senior counsel for Oak View Legal Group, he gives advice and writes articles to help solve their debt problems.
This article is reproduced with permission from NextAvenue.org, © 2021 Twin Cities Public Television, Inc. All rights reserved.
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