Understanding Your Retirement Savings Needs
“Start where you are, use what you have, do what you can.” This quote by Arthur Ashe is a solid approach to retirement. It’s important to simply get started when saving for retirement.
But, it can be hard to think about saving for retirement.
There are so many pressing needs for your money right now that finding resources to set aside can be tricky. Getting started can also be hard if you feel behind. And these feelings aren’t uncommon. According to a Bankrate survey, 55% of Americans say they feel behind when it comes to retirement savings.
Whether you’re just getting started in your career and want to start saving for retirement or you’re approaching retirement age, it can be helpful to understand a couple of things.
- First, you’re not alone! There are many working-age Americans in different stages of life who’re figuring out their retirement savings.
- Second, there are some guidelines that can help you determine your retirement needs and how much to save. To start understanding your retirement savings needs and plan for your retirement, here are a few things to keep in mind.
Guidelines for What to Have Saved for Retirement Based on Age
One of the most common questions about retirement savings people ask is how much they should have saved at or by a particular age. While recommendations vary a bit, here are some guidelines from Fidelity Investments that are similar to those seen by other investment firms and banks.
| Age | Amount to Have Saved | |
| 30 | 1x your annual income | |
| 40 | 3x your annual income | |
| 50 | 6x your annual income | |
| 60 | 8x your annual income | |
| 67 | 10x your annual income | |
It’s important to note that these recommendations include all funds that you could use during your retirement. You’ll want to look at your retirement accounts sponsored by your employer(s), any individual retirement accounts you own, and any other funds you have invested outside of your retirement.
If you see these numbers and feel behind or like retirement is out of reach, don’t panic.
These numbers are ultimately just guidelines. While they can give you a place to start and a goal to work towards, the most important piece of the puzzle is to start saving toward retirement as soon as possible. The earlier you start, the larger your retirement should be able to grow over time due to compound interest.
Determining How Much You Might Need
As you look at the guidelines for how much to have saved at each age, you might be curious if you can get the numbers more specific to your situation to get a more personalized estimate. The good news is there are a few different ways to calculate your retirement need. You could always use a retirement calculator online. But if you’d like to do a few quick calculations by hand, here are two commonly used methods.
Using a Wage Replacement Ratio
Calculating how much you might need for retirement using a wage replacement ratio can help you get a more accurate estimate for your situation. A wage replacement ratio helps you figure out your retirement needs by determining how much of your pre-retirement income you’ll need to maintain your current lifestyle during retirement.
Typical industry recommendations for wage replacement ratios are between 70%-90% of your pre-retirement income. It is uncommon to have a wage replacement ratio of 100% because some expenses you currently face will disappear during retirement. Once you’re not working anymore, you’ll likely not have childcare costs, costs for clothes, or supplies specific to work, and often your mortgage will be paid off. So, reducing your income needed during retirement is common.
Let’s look at an example of how this works. If you’re currently earning $100,000 a year and you’ve picked a wage replacement ratio of 80%, you’ll need to have income of $80,000 for your first year of retirement.
You can then assume that each additional year you’ll continue to need the $80,000 to replace your earned income.
So, if you plan to be retired for 20 years, you’d need roughly $1,600,000 saved to make this happen.
It’s important to note that this calculation does not account for inflation, which will affect your retirement savings. But this can also get you a ballpark figure to aim for.
It’s important to remember your retirement income doesn’t all have to come from a personal or business retirement plan. You can also include your social security benefits or income from other investments. You could even choose to supplement your income needed in retirement with a part-time job you enjoy.
Using the 4% Withdrawal Method
Another way to calculate your retirement needs is using the 4% withdrawal method. This method assumes that you’ll withdraw 4% of your retirement principal each year to live off of. This strategy aims to preserve some of the principal of your retirement savings so you don’t run out of money.
To calculate your need under this method, you’d multiply your current annual spending by 25. So, if you currently spend $50,000 each year, your retirement savings would need to be $1,250,000 when you retire, allowing you to withdraw 4% of your retirement savings each year, adjusted for inflation, during your retirement.
How Much to Save Each Month
Once you have a rough estimate of your retirement needs, it’s time to figure out how best to reach your goals.
One of the most common recommendations in the industry is to save a set percentage of your monthly income. This tactic can be helpful because it allows you to start small where you are and can help you combat lifestyle inflation as your salary increases over time.
Typical recommendations are to save 15% of your annual income towards retirement. But even if you start with 5% or 10%, getting started and building the habit of saving is the key.
As you receive raises or change jobs, continue to save the same percentage of your income towards retirement, and if you find room in your budget, increase your contributions when you can. This will help your contributions grow over time and increase the funds available to you when you’re ready to retire.
Above All – Don’t Get Discouraged
When you start looking at the numbers for retirement, it’s normal to get overwhelmed. Some people even become a bit discouraged. It’s important to know these numbers are a guide, and they can help you build your financial plan. But it’s also important not to get so focused on the numbers that you feel stuck or, even worse, give up.
What you’ll need in retirement is a very personal choice and depends on what you want retirement to look like, where you’ll live, when you feel you’re ready to retire, and whether you will keep working in some capacity after you retire.
Remember, starting where you are and doing what you can now, no matter your age, will help you make progress on your goals.
Review your budget to see if you can find additional money to save. Also, be sure to look at your company-sponsored retirement plan and contribute enough to earn any matching contributions your employer makes. If you’re closer to retirement age and concerned about not having enough, look into catch-up contributions for your account type. For those over 50, in most cases, you can contribute more towards your retirement to help you save money to get closer to your goal.
The biggest mistake you can make in saving for retirement is not getting started. Even if it is a small amount, get started today!
Kimbree Redburn is an Accredited Financial Counselor® with a background in economic development. She works with her clients to help them understand their financial options and make money decisions with confidence. She believes that financial education gives people a chance to build a better life.