Determining how much money you will need at retirement can be a challenge in the early stages of your career. However, some helpful planning benchmarks can assist you in determining if you are on the right track.
The Benchmark by Fidelity
Fidelity Investments analyzes data to estimate the ideal amount of savings needed at certain ages. They estimated the amount you will need to maintain the same lifestyle if you plan to retire at age 67.
Fidelity recommends that you have saved an amount equal to your current salary by age 30. They suggest saving at least 15% of your income annually, starting at age 25. After that, you should invest more than half of your savings in stocks throughout your life. If you wish to improve your standard of living, this plan may not work for you. To maximize this plan, you will need to maintain your current lifestyle.
In fact, it is preferable to have the equivalent of 10 times your salary saved for retirement in order to stop working at age 67, using the same set of assumptions.
The Benchmark by T. Rowe Price
T. Rowe Price takes a different approach to retirement savings benchmarks. Their multiple savings benchmarks start with smaller figures and increase more rapidly at age 50. This system indicates that a 30-year-old will be considered on track if they have saved half of their annual salary, but will need to set aside 11 times their salary by the time they reach age 65.
The Benchmark by J.P. Morgan Asset Management
The J.P. Morgan Asset Management Retirement Guide 2019 uses a number of benchmark models. In the first model, the annual gross savings rate is assumed to be 5% if you earn less than $100,000 a year. The second model assumes a 10% rate if you earn $100,000 or more. Others use a pre-retirement return rate of 6%, a post-retirement return rate of 5%, an inflation rate of 2%, a retirement age of 65 for the main earner, and 62 for the spouse. It also assumes you will spend 30 years in retirement and wish to maintain the same lifestyle you had before retirement.
The J.P. Morgan model uses a set of multiple benchmarks based on your annual pre-tax income. For example, a 30-year-old with a total annual income of $50,000 is on track if they have saved 0.8 times their income, or $40,000 in retirement accounts. The saving factor jumps to 1.2 times your income ($210,000) if your total annual income is $175,000.
The 80% Rule
Another measure used to estimate retirement savings is the 80% rule. This method states that you should aim to replace 80% of your income before retirement.
A simpler version of this method involves taking 80% of your annual salary and then multiplying the result by 20 for a 20-year retirement period. The result is the amount you will need in total retirement savings.
Now divide this number by the number of years you have left before retirement, assuming you have not started saving yet. This is the amount you should save each year to achieve your goal.
For example, if you earn $45,000, you will need 80% of that, which is $36,000 a year, in retirement. Multiply $36,000 by 20 years, and you will have $720,000. If you are 30 years old, have no retirement savings yet, and expect to retire at 65, you will need to save an average of about $20,600 annually for the next 35 years: $720,000 divided by 35.
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You have already started saving, so you will subtract the amount you have now from the amount needed over 20 years. Then divide that by the number of years you have left until retirement to determine the amount you will need to save each year in the future. If you already have $15,000 in savings, you will subtract that from $720,000, then divide $705,000 by 35 to arrive at savings of approximately $20,140 per year.
Retirement Calculations
You should not solely rely on benchmarks to measure your savings progress, but they do provide some guidelines that can be useful during the early stages of your career.
The best way to determine your ideal savings rate is to run a basic retirement calculation. It’s important to rely on detailed retirement estimates if you do not plan to retire in your sixties, as most retirement planning benchmarks use retirement starting at age 65 or 67 in their estimates.
Most calculators allow you to input personal variables that can affect the outcomes, such as the age you started working and saving, your average return rate on investments, whether you also have a pension, and whether you have or expect to have other assets generating passive income, such as rental properties.
Next Steps
Don’t worry if your current retirement savings amount is less than these goals. You can take some important steps to get your plan back on track.
First, focus on your overall financial wellness and the things you can control right now. Building a strong financial foundation often means creating an emergency fund, paying down high-interest debt, and saving enough in your retirement plan to capture any employer matching funds.
Next, determine the amount you can potentially save. Most financial planners recommend saving 10% to 20% of your annual income for retirement. Aim to achieve the highest percentage possible, and commit to reaching that goal every year.
Participating in automatic wage increase programs that your employer-sponsored retirement plans may offer is a great way to account for contribution increases over time and help you close any savings gaps.
The Balance does not provide tax, investment, or financial advice. The information is presented without regard to the investment objectives or risk tolerance or financial circumstances of any specific investor and may not be suitable for all investors. Investors should consider seeking a financial professional to determine an appropriate strategy for retirement savings, taxes, and investments.
Source: https://www.thebalancemoney.com/how-much-should-i-have-in-my-401k-at-30-4159567
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