A solid retirement plan requires making a series of important decisions. Once you've committed to saving for retirement in a 401(k) or IRA (or both!) you've got another decision to wrestle with: how much should save for retirement?
Experts recommend that you should save at least 15% of your pre-tax income for retirement. However, there are many personal variables to consider. For instance, do you think your retirement living expenses might be similar/lower/higher than your current expenses? How much you expect to receive from Social Security? Do you come from a family where living well into your 80s (and 90s) is common?
Taking the time to think through those variables, and learn some important guidelines can help you land on an informed savings rate that can help you reach your retirement goals. That's bound to have an instant payoff: less stress. Less than one-in-five workers say they are very confident they will have enough to live comfortably in retirement.
It's likely a key takeaway will be that you will want to find ways to increase your savings rate. A report from the nonpartisan National Institute on Retirement Security reports that about two-thirds of working households aren't currently on a pace to meet conservative estimates of what is needed for a comfortable retirement. Can't imagine how you'll pull that off? Check out 10 Easy Ways to Save Money Every Month.
Step 1: Hone Your Assumptions About the Future
There's no getting around that retirement planning is built on a bunch of assumptions that are on some level guesses. That said, you want to make the most educated guesses possible, and use them to adjust your savings plan accordingly.
Some people do a major downsize in retirement and find that their living costs are just 70% to 80% of their costs before they retired. Keep in mind, that one major expense you won't have in retirement is saving for retirement. Aiming to pay off your mortgage before you retire would also reduce your living costs. Still, some retirees don't have a big drop-off in expenses, whether it's because of a great desire for travel or large out of pocket medical costs.
A survey of retiree spending found that in the first two years of retirement, four in 10 households saw their spending fall by at least 20% compared to their pre-retirement spending, and more than four in 10 spent more. In year six of retirement, about half of households were spending 20% less than before retirement, and 33% were spending more.
The longer you need your retirement savings to support you, the more you probably want to have stored up. A 65-year old woman today has a life expectancy of nearly 21 years. For a 65-year old male life expectancy is nearly 18 years. What those statistics really mean is that a 65-year old has a 50% chance of still being alive at 86/82. Yep, there's a 50% chance you will live longer.
Figure you'll just keep working longer? You've got plenty of company. According to the Employee Benefit Research Institute, more than half of today's workers expect to still be working past age 65. Yet less than 15% of today's retirees were still working past 65. In many instances, illness, a downsizing, or needing to care for a family member pushes people to retire earlier than expected.
Step 2: Estimate How Much of the Heavy Lifting You Personally Need to Do
Get estimates of the income you might get from:
- A Pension: Increasingly rare these days, but if you are indeed in line for a traditional pension, ask for an estimate of your benefits.
- Social Security: Use Social Security's free tool to check what your benefit might be. The estimate is based on your actual earnings record on file.
That gives you a pretty good idea of what monthly income you might have coming in. If that's enough to live on, your set! But if that's not what you want (or need) to live comfortably you've got a retirement income gap. Saving more today is one way to close the gap. Strategizing how to spend less—now, and in retirement—is another tactic to consider.
Step 3: Aim to Save 15% of Pretax Income
Retirement experts—academics, and generally wonky people who spend their days thinking about retirement issues—typically recommend that aiming to save 15% of your pretax income for retirement is a solid plan to build sufficient funds.
Your target savings rate might be different based on the age when you start saving, and the returns you earn. For instance, researchers estimate that if you start saving at 25 and earn the average long-term historical returns from stocks and bonds an 8% rate for a single person might be just fine if you plan to retire at 65. If returns are lower than average, a rate of 11% to 15% is a safer target. Wait until age 40 to start saving and a savings rate of more than 20% might be needed if portfolio returns are below historic norms.
Step 4: Check Your Progress
Saving for retirement is a lot like a long road trip. Every once in awhile it's nice to check the GPS to see your progress. Fidelity crunched a whole lot of numbers based on all sorts of assumptions about earnings, saving rates, portfolio returns and longevity and came up with estimates for how much of your current salary you want to have saved in retirement accounts at different ages:
Recommended Savings Level By Age
(Multiple of Salary)*
* In other words, this is amount of money you should have squirrelled away for retirement at various ages.
Another way to track your progress is to get a sense of how much monthly income your current retirement savings might be able to generate for you over a long retirement. There are many free online calculators that will generate a monthly income estimate based on your personal savings, and various assumptions you plug in (Longevity, rate of investment returns, even the tax bracket you might be in). If you are saving in a workplace retirement plan, such as a 401(k), check your statement; an increasing number of plans now include not just your total balance, but an estimate of how much monthly income that might be able to generate.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on September 29, 2017, and has been updated.